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

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

The CAPM Calculator computes the expected return of an asset based on the Capital Asset Pricing Model formula E(R) = Rf + β × (Rm − Rf). Taking the risk-free rate, asset beta, and expected market return as inputs, it determines the market equity risk premium and required rate of return. The model assumes systematic market risk is the sole priced risk factor and that the selected beta remains stable across the investment horizon.

How it works

Enter the risk-free rate (e.g. current 3-month T-bill or 10-year Treasury yield).
Enter the asset's beta — a measure of its volatility relative to the market (1.0 = market, >1 = more volatile).
Enter the expected market return (historical S&P 500 average is around 10%).
The tool applies E(R) = Rf + β × (Rm − Rf) and shows the expected return instantly.
Review the equity risk premium and step-by-step breakdown below the result.

Use cases

Estimate the required return on a stock before buying.
Set a hurdle rate for equity investments in a DCF model.
Evaluate whether a stock's expected return compensates for its risk.
Compare required returns across assets with different betas.
Academic coursework: CFA, MBA finance, and investment analysis.
Plug the CAPM result into a WACC calculation as the cost of equity.

Frequently Asked Questions

Last updated: 2026-06-11 · Reviewed by Nham Vu