CAPM Calculator

Calculate Expected Return using Capital Asset Pricing Model

Last updated: 10/8/2026

The Capital Asset Pricing Model gives the return an investor should require from a stock given how much market risk it carries. It starts from the return available with no risk, adds the extra return the whole market is expected to earn, and scales that premium by the stock's beta. The result is widely used as the cost of equity in WACC and valuation work. Enter a risk-free rate, the stock's beta, and an expected market return.

Calculator Inputs

Risk-Free Rate*

e.g., 10-year Treasury yield

Beta (β)*

Measure of volatility relative to market

Expected Market Return*

e.g., S&P 500 average return

Results

Enter values above to see your results

The result depends entirely on the beta and market premium you enter, both of which are estimates that vary by source and period. It is a required-return benchmark, not a prediction of what a stock will earn.

How It Works

Expected return = Rf + β × (Rm − Rf). Rf is the risk-free rate, usually a government bond yield matching your horizon; Rm − Rf is the market risk premium, the excess return expected from a broad stock index over the risk-free asset; β measures how much the stock moves with the market (β = 1 moves with it, β = 2 moves twice as much, β = 0.5 half as much). The calculator shows the market premium and the beta-adjusted premium separately so you can see which drives the result.

Choosing the inputs

Risk-free rate: the 10-year US Treasury yield is the common choice for equity valuation; use the equivalent government bond in other markets. Beta: published figures are regressions of the stock's returns against an index over two to five years and differ between data providers; a beta from monthly data over five years is the most common convention. Market return: rather than a raw historical average, most practitioners pick a market risk premium directly (long-run US estimates cluster around 4% to 6%) and add it to the current risk-free rate to get Rm.

Reading the result

CAPM output is a required return, not a forecast. If you expect a stock to earn less than its CAPM return, the model says it is overpriced for its risk; if more, underpriced. For a company, the figure is the return shareholders need, which makes it the cost of equity.

Worked example

Default inputs: Rf 4%, β 1.2, Rm 10%

Market risk premium:10% − 4%= 6.00%

Beta-adjusted premium:1.2 × 6.00%= 7.20%

Expected return:4% + 7.20%= 11.20%

With β = 0.8 the same market numbers give 4% + 4.8% = 8.80%; a lower-beta stock requires a smaller return.

Tips & Best Practices

•β above 1 means the stock has historically moved more than the market; β below 1 means less. A negative β (rare, e.g. some gold miners in certain periods) implies the stock tends to move against the market.
•Keep Rf consistent: the same bond yield should appear in the risk-free term and inside the market premium.
•Beta is backward-looking and changes when a company's business or leverage changes; recheck it rather than reusing an old figure.

Frequently Asked Questions

What if the market return is lower than the risk-free rate?

The market premium becomes negative and the formula gives a required return below the risk-free rate for any positive beta. That is a sign the inputs are inconsistent (for example a short-term historical return paired with a current bond yield), not a meaningful result. Use a long-run premium estimate instead.

Is CAPM accurate?

It is a simplification. Empirically, low-beta stocks have earned more and high-beta stocks less than CAPM predicts, and factors such as company size and value have explained returns that beta alone does not. CAPM remains the default because it is simple, transparent, and widely accepted in valuation and regulatory settings.

Can I use CAPM for the whole market or an index fund?

Yes. A broad index fund has β ≈ 1, so its CAPM return equals the expected market return you entered. The formula only adds information when beta differs from 1.

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