The Capital Asset Pricing Model (CAPM) is a formula that describes the relationship between systematic risk and expected return for an asset. It states that E(R) = Rf + β × (Rm − Rf), where Rf is the risk-free rate, β is the asset's beta, and (Rm − Rf) is the market risk premium.

What is beta in CAPM?

Beta measures how much an asset's return moves relative to the overall market. A beta of 1.0 means the asset moves with the market. Above 1.0 means more volatile (higher risk, higher expected return); below 1.0 means less volatile. Negative beta means the asset tends to move opposite the market.

What risk-free rate should I use?

Common choices are the 3-month US Treasury bill rate (short-term analysis) or the 10-year US Treasury yield (long-term or equity valuation). Use a rate that matches the investment horizon.

What expected market return should I use?

The S&P 500 long-run average nominal return is roughly 10% per year. Many analysts use 8–10% depending on their outlook. You can also use Rm = Rf + ERP, where ERP is the equity risk premium (typically 4–6%).

What are the limitations of CAPM?

CAPM assumes markets are efficient, investors hold diversified portfolios, and beta is stable. In practice, beta changes over time and other factors (size, value, momentum) also drive returns. It remains a useful benchmark despite its simplifications.

How does CAPM relate to WACC?

CAPM is commonly used to compute the cost of equity (Ke) in the WACC formula. You calculate the required equity return via CAPM, then combine it with the after-tax cost of debt weighted by capital structure.

CAPM Calculator

Name: CAPM Calculator
Availability: InStock
Author: Nham Vu

Enter the risk-free rate, asset beta, and expected market return to compute the required return using the Capital Asset Pricing Model.

CAPM Inputs

Risk-Free Rate (%)

Typically the 10-year Treasury yield

Asset Beta (β)

1.0 = market; >1 riskier; <1 more stable

Expected Market Return (%)

S&P 500 long-run average ≈ 10%

Equity Risk Premium (Rm − Rf) = —

Expected Return E(R)

—

E(R) = Rf + β × (Rm − Rf)

Risk-Free Rate

—

Beta (β)

—

Risk Premium

—

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Summary