Free capm calculator
See the return an asset should earn for its risk. Enter the risk-free rate, the asset's beta, and the expected market return, and the CAPM calculator returns the expected return — the cost of equity — along with the equity risk premium that beta scales — updated live, as you type.
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Estimates only, based on the values you enter. CAPM is a model, not a guarantee. Not investment advice.
Results are estimates. Consult a professional.
What is the Capital Asset Pricing Model (CAPM)?
The Capital Asset Pricing Model (CAPM) is the standard way to estimate the return an investor should expect from an asset given its risk. Its core idea is simple: a riskier asset must offer a higher expected return to be worth holding. CAPM measures that risk with a single number — beta — and turns it into a required return by adding a risk premium on top of the risk-free rate. This CAPM calculator returns that expected return the moment you enter the risk-free rate, the asset's beta, and the expected market return.
Developed in the 1960s by William Sharpe and others building on Harry Markowitz's portfolio theory, CAPM rests on one key insight: investors are only rewarded for systematic risk — the market-wide risk that cannot be diversified away. Risk specific to a single company can be eliminated by holding many stocks, so the model assumes the market pays you nothing extra for bearing it. Only the risk you cannot escape earns a premium.
The CAPM formula
CAPM starts from the risk-free rate and adds a risk premium scaled by the asset's beta. The premium itself is the difference between the expected market return and the risk-free rate — the equity risk premium:
How to calculate cost of equity with CAPM
Calculating the expected return is a three-step process once you have gathered the three inputs. Each one comes from a different source:
- Find the risk-free rate (Rf). Use a current government bond yield — the 10-year US Treasury for long-term valuation, or a shorter T-bill for near-term analysis.
- Find the beta (β). A public stock's beta is published on most financial data sites; it is calculated from how the stock's returns have moved against the market.
- Estimate the equity risk premium (Rm − Rf). Subtract the risk-free rate from the expected market return. Many analysts use a market return of 8–10%, giving a premium in the 5–7% range.
Then plug the pieces into Re = Rf + β × (Rm − Rf). The calculator above does the arithmetic instantly as you move the sliders — multiply beta by the equity risk premium, then add the risk-free rate back on.
The three CAPM inputs explained
Risk-free rate (Rf)
The risk-free rate is the baseline return you could earn with virtually no risk of loss. In practice there is no truly risk-free asset, so analysts use the yield on a highly-rated government bond as a proxy — the 10-year US Treasury is the most common choice for valuing equities, because its horizon roughly matches a long-term equity investment.
Expected market return (Rm)
The expected market return is what you anticipate the overall market will earn, usually proxied by a broad index such as the S&P 500. It can be based on long-run historical averages or forward-looking estimates; a figure of 8–10% is a common assumption for US equities. The gap between this and the risk-free rate is the equity risk premium that beta scales.
What beta means in CAPM
Beta is the heart of CAPM: it measures how much an asset's return moves relative to the market as a whole. A beta of 1 means the asset tends to move one-for-one with the market. Above 1 means it amplifies market moves — more volatile and therefore a higher expected return. Below 1 means it dampens them — less volatile and a lower expected return.
| Beta value | What it means | Typical examples |
|---|---|---|
| β = 0 | Return is unrelated to the market; CAPM gives the risk-free rate | Cash, short-term Treasury bills |
| 0 < β < 1 | Less volatile than the market; a lower expected return | Utilities, consumer staples, large defensive stocks |
| β = 1 | Moves with the market; expected return equals the market return | A broad index fund tracking the S&P 500 |
| β > 1 | More volatile than the market; a higher expected return | Technology, high-growth, and cyclical stocks |
| β < 0 | Moves opposite to the market; expected return below the risk-free rate | Some gold and hedge-style assets |
Beta scales the equity risk premium: the further beta sits from zero, the more the asset's expected return diverges from the risk-free rate.
Beta is calculated as the covariance of the asset's returns with the market's, divided by the variance of the market's returns — but you rarely compute it by hand, because published betas are available for most listed stocks. One subtlety for company valuation: a stock's quoted (levered) beta reflects its debt, so analysts sometimes unlever and re-lever beta to match the capital structure they are modelling.
A worked example using the CAPM calculator
Suppose the 10-year Treasury yields 3%, you expect the market to return 10%, and the stock you are valuing has a beta of 0.8. Here is how the calculator gets from those three inputs to a single expected return — these are also the calculator's starting values, so you land on the page already seeing the result.
Step 1 — Find the equity risk premium
Subtract the risk-free rate from the expected market return: 10% − 3% = 7%. This 7% is the extra return investors demand for holding the market instead of the risk-free asset.
Step 2 — Scale the premium by beta
Multiply the 7% premium by the stock's beta of 0.8: 0.8 × 7% = 5.6%. Because beta is below 1, the stock earns less than the full market premium — it is less volatile than the market.
Step 3 — Add the risk-free rate back
| Component | Value |
|---|---|
| Risk-free rate (Rf) | 3.0% |
| Equity risk premium (Rm − Rf) | 7.0% |
| Beta (β) | 0.8 |
| Beta × premium | 5.6% |
| Expected return (Re) | 8.6% |
Re = 3% + 0.8 × 7% = 3% + 5.6% = 8.6%.
The security market line (SML)
Plot expected return against beta and CAPM becomes a straight line — the security market line (SML). It starts at the risk-free rate where beta is zero and slopes upward, with the equity risk premium as its slope. Every fairly-priced asset, according to the model, sits exactly on this line: its expected return is precisely what its beta justifies.
| Beta | Expected return on the SML | Read as |
|---|---|---|
| 0.0 | 3.0% | The risk-free rate — no market exposure |
| 0.5 | 6.5% | Half the market premium |
| 1.0 | 10.0% | The full market return |
| 1.5 | 13.5% | 1.5× the market premium |
Points on the SML using Rf = 3% and a 7% equity risk premium. Each step in beta adds 7% × the step to the expected return.
The line is also a valuation tool. An asset plotting above the SML offers more return than its risk warrants — it looks underpriced. One plotting below the line offers too little for its risk — it looks overpriced. In this way the SML turns CAPM into a benchmark for whether an asset is a good deal for the risk it carries.
CAPM as the cost of equity in WACC
CAPM's most common job in corporate finance is supplying the cost of equity. Shareholders never send an invoice for their required return, so it has to be estimated — and CAPM is the standard estimate. The expected return the model produces for a company's stock is exactly the cost of equity (Re) that analysts plug into the weighted average cost of capital.
So CAPM feeds directly into firm valuation: estimate the cost of equity here, then carry it into the WACC calculator as the Re input, and use the resulting WACC as the discount rate in a DCF business valuation. A higher beta raises the cost of equity, which raises WACC, which lowers the present value of the company — risk flows straight through to value.
What is a good CAPM expected return?
There is no single 'good' number — the expected return CAPM gives you is a required return, the bar the asset must clear to compensate for its risk, not a promise of performance. The right way to read it is relative: compare the expected return to what you actually believe the asset will earn. If your own forecast exceeds the CAPM figure, the asset may be attractive; if it falls short, the risk is not being paid for.
As rough anchors, CAPM results for US equities often land in the high single digits to mid teens, with most between roughly 10% and 15%. A low single-digit result can be reasonable for a very low-beta, defensive asset, while a high-teens figure signals a high-beta, high-risk holding. Whatever the number, treat it as one estimate — it is only as good as the beta and the equity risk premium you fed it.
CAPM assumptions and limitations
CAPM is elegant because it rests on strong simplifying assumptions — and those same assumptions are its main weakness. The model assumes that investors are rational and risk-averse, hold diversified portfolios, share the same expectations and time horizon, and trade in frictionless markets with no taxes or transaction costs and the ability to borrow and lend at the risk-free rate.
Real markets violate every one of those, which is why CAPM is a useful approximation rather than a precise forecast. The most important practical limitations:
- Beta is unstable. It is estimated from past data and changes over time, so two analysts can compute different betas for the same stock and get different answers.
- Inputs are judgment calls. The risk-free rate and especially the equity risk premium are estimates, and small changes in them move the result by a full percentage point or more.
- It is a single-period, single-factor model. CAPM uses one risk factor and one holding period; multi-factor models add size, value, and other factors that CAPM ignores.
- Empirical fit is imperfect. Studies find that real returns do not line up with beta as cleanly as the theory predicts, so CAPM is best used alongside other valuation methods, not on its own.
Formula and sources
This calculator applies the standard CAPM identity, Re = Rf + β × (Rm − Rf), exactly as defined in corporate-finance texts and references such as Corporate Finance Institute and Wall Street Prep. Inputs are entered as percents; beta is a unitless multiplier. The market-return and equity-risk-premium anchors cited above are illustrative long-run figures and move with interest rates and market conditions.
Corporate Finance Institute — What is CAPM (Capital Asset Pricing Model)?Wall Street Prep — Capital Asset Pricing Model (CAPM): formula and calculator.Frequently asked questions about the free capm calculator
About this CAPM calculator
This CAPM calculator runs entirely in your browser. Every figure you enter stays on your device — nothing is sent to a server, logged, or shared. It applies the standard Re = Rf + β × (Rm − Rf) formula, working out the equity risk premium and scaling it by beta, and updates instantly as you move the sliders.
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