CAPM Calculator – Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) establishes a linear relationship between the systematic risk of an investment and its expected return. The core calculation relies on two primary formulas. First, the risk premium of the asset is determined by multiplying the asset's beta by the market risk premium: Risk_asset = Beta_asset * (Return_market - Return_risk_free). Next, the total expected return of the asset is found by adding this risk premium to the baseline risk-free rate: Return_asset = Return_risk_free + Risk_asset. Beta measures the sensitivity of the asset's returns relative to market movements.

Imagine you are evaluating a stock with a Beta asset of 1.2, indicating it is slightly more volatile than the overall market. Assume the current Return_risk_free rate (such as a 10-year Treasury bond) is 3.5%, and the expected Return_market is 10.0%. First, compute the market risk premium: 10.0% - 3.5% = 6.5%. Next, calculate the asset's risk premium: 1.2 * 6.5% = 7.8%. Finally, add the risk-free rate to find the total expected return: 3.5% + 7.8% = 11.3%. Thus, the CAPM expected return for this asset is 11.3%.

Always use consistent time horizons for your risk-free rate and market return inputs, typically utilizing annual figures. Remember that beta is historical and may not accurately predict future volatility during sudden market regime shifts. Finally, treat CAPM results as a theoretical baseline rather than a guaranteed future outcome, as real-world market anomalies and company-specific events can significantly alter actual performance.