This CAPM calculator helps you to calculate CAPM or the Capital Asset Pricing Model. The CAPM model is mainly used to determine the relationship between risk and return of the asset. To calculate your CAPM enter the risk-free rate of return (Rf), market return (Rm), and the value of Beta, then hit the “Calculate” button.
The formula for CAPM we used in this calculator is,
E(R) = Rf + (Rm – Rf)β
- The expected return = risk-free rate + (beta × market risk premium)
- Risk-free rate: The return from a safe investment (like government bonds).
- Beta: How much the investment moves compared to the overall market. A beta higher than 1 means more risk, while less than 1 means less risk.
- Market risk premium: The extra return expected from investing in the stock market over a risk-free investment.
Do you want to measure risk? Use our Standard Deviation Calculator
Understanding the CAPM in Simple Terms
The Capital Asset Pricing Model (CAPM) is a financial formula used to estimate the expected return on an investment. It helps investors understand the relationship between the risk of an asset and its potential return. CAPM is based on the idea that investors need to be compensated for both the time value of money and the risk they take.
CAPM helps investors decide if a stock’s potential return justifies the risk. For example, if your CAPM result is 12%, it means that you can expect a 12% return on the investment, given its risk level. It also suggests that to take on the specific risk of that investment, you should expect a 12% return annually to make it worthwhile.
If the actual return you expect to get is higher than the CAPM result the investment might be considered undervalued (a good deal). If the actual return is lower, it might be overvalued (less attractive).