CAPM Calculator
Expected return from risk-free rate, beta, and market premium.
Expected return (cost of equity)
Estimates for planning only, not financial advice.
The Capital Asset Pricing Model prices risk in one line: expected return equals the risk-free rate plus beta times the market risk premium. It answers "what annual return should investors demand from this asset given how it moves with the market?" With a 4% risk-free rate, a beta of 1.2, and a 10% expected market return, the answer is 11.2%. That number becomes the cost of equity in valuations, the hurdle rate for projects, and the benchmark for judging past performance.
How to Use This Calculator
Enter the risk-free rate as the current 10-year government bond yield in your currency, beta from your data provider or comparable companies, and your expected market return over the same horizon. The calculator returns the CAPM expected return, the market risk premium it used, and the risk premium specific to your beta. Move beta up and down to feel how sensitive the answer is: each 0.1 of beta is worth 0.6 percentage points of expected return at a 6% market premium.
Set the risk-free rate to the 10-year Treasury yield (about 4% recently) matched to your valuation currency.
Enter beta: 1 for market-like risk, above 1 for aggressive, below 1 for defensive. Negative for hedges.
Set the expected market return, often 9 to 10% for US equities. Read the cost of equity, then feed it into our WACC calculator as the equity input.
The CAPM Formula
The logic is compensation for risk you cannot diversify away. The risk-free rate is what you earn for lending to the government; the market risk premium is the extra for bearing equity risk; beta scales that extra to the asset\'s own sensitivity. Company-specific risk gets no premium in the model because diversified investors can eliminate it for free, which is the model\'s most debated assumption and the source of most of its criticism.
Worked Example
A technology stock has a beta of 1.2, the 10-year Treasury yields 4%, and you expect the market to return 10% annually. Market risk premium is 10% - 4% = 6%. Asset risk premium is 1.2 x 6% = 7.2%. Expected return is 4% + 7.2% = 11.2%. If the stock\'s fundamentals suggest it will actually return 14%, it plots above the Security Market Line: attractive on a risk-adjusted basis. If it suggests 9%, it plots below: you are not being paid for the risk. A utility stock with beta 0.6 under the same assumptions expects 4% + 0.6 x 6% = 7.6%, lower return for lower risk, exactly the tradeoff the model prices.
CAPM Inputs and Their Judgment Calls
| Input | Standard choice | What to watch |
|---|---|---|
| Risk-free rate | 10-year government bond yield | Match currency and horizon to the valuation |
| Beta | 2 to 5 year regression vs index | Unstable; adjust toward 1 for extreme values |
| Market return | 9 to 10% for US equities | Historical average vs forward estimate debate |
The honest way to use CAPM is as the center of a range, not a point estimate. Run it with beta 0.2 each side of your estimate and the market premium at 4% and 6%; if your investment decision survives the whole range, it holds up. If it hinges on one precise combination, you do not have a thesis, you have a hope. For the next steps, our cost of capital calculator blends this result with debt into WACC, our cost of equity calculator cross-checks via the dividend model, and our business valuation calculator discounts cash flows with the result.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is the Capital Asset Pricing Model (CAPM)?
CAPM is a formula for the expected return of an asset given its risk: expected return = risk-free rate + beta x (market return - risk-free rate). It says investors demand the risk-free rate plus a premium proportional to the asset's systematic risk. With a 4% risk-free rate, a beta of 1.2, and a 10% expected market return, CAPM gives 4% + 1.2 x 6% = 11.2%.
What is beta in CAPM?
Beta measures how much an asset moves with the overall market. A beta of 1 moves with the market; 1.5 moves about 50% more, in both directions; 0.5 moves about half as much. Negative beta assets move opposite the market. Beta captures only systematic risk, the market-wide risk you cannot diversify away, which is why CAPM prices only beta and ignores company-specific risk.
What should I use for the risk-free rate?
The standard proxy is the yield on long-term government bonds of the investor's country: the 10-year US Treasury for US valuations, currently around 4%. Match the rate's horizon to your valuation horizon and its currency to your cash flows. Using a short-term bill rate for a 10-year DCF understates the risk-free component; consistency matters more than precision.
What is the market risk premium?
The market risk premium is the extra return investors expect from stocks over the risk-free rate: the (market return - risk-free rate) term. For the US, long-run historical estimates cluster around 4% to 6%. With a 4% risk-free rate and 10% market return, the premium is 6%, and a stock with beta 1.2 earns 7.2% of premium on top of the 4% base, totaling 11.2%.
How is CAPM used in business valuation?
CAPM produces the cost of equity, which feeds into WACC (weighted average cost of capital), which is the discount rate for valuing a company's cash flows. A higher beta means a higher cost of equity, a higher discount rate, and a lower valuation. This chain, beta to cost of equity to WACC to value, is the standard valuation plumbing taught in every finance program.
What are the criticisms of CAPM?
Plenty. Beta is backward-looking and unstable; the model assumes efficient markets and a single market portfolio nobody can observe; and empirical tests show low-beta stocks often outperform what CAPM predicts. Practitioners still use it because the alternatives are more complex, not because it is exactly true. Treat CAPM as a structured starting estimate, then sanity-check against market multiples and your own judgment.
What is the difference between CAPM and WACC?
CAPM gives the cost of equity only: what shareholders demand. WACC blends that with the after-tax cost of debt, weighted by the capital structure: WACC = (E/V) x Re + (D/V) x Rd x (1 - tax). Use CAPM's result as the Re input to WACC. Our cost of capital calculator runs the full WACC computation once you have the CAPM number.
Can beta be negative? What does it mean?
Yes. A negative beta means the asset tends to rise when the market falls, like gold or certain hedge strategies. CAPM then predicts an expected return below the risk-free rate, which makes sense: you accept lower returns for insurance-like behavior. Negative-beta assets are valuable in portfolios precisely because of this diversification effect, not despite their low expected return.
How do you find a company's beta?
Published betas come from financial data providers, computed by regressing the stock's returns against a market index over 2 to 5 years. Raw regression betas are often "adjusted" toward 1 on the theory that extreme betas drift back over time. For private companies, use the beta of comparable public companies, unlevered and relevered for your capital structure.
What is the Security Market Line?
The Security Market Line is CAPM drawn as a graph: expected return on the vertical axis, beta on the horizontal, a straight line from the risk-free rate (beta 0) through the market portfolio (beta 1). Assets plotting above the line are undervalued by the model's logic, offering more return than their risk warrants; assets below it are overvalued. It is the visual version of the same equation this calculator runs.