CAPM Calculator
Calculate the expected return on an investment using the Capital Asset Pricing Model. Enter the risk-free rate, beta, and expected market return to get instant results.
Input Parameters
Security Market Line (SML)
Sensitivity Analysis
Expected return at different beta values with current risk-free rate and market return:
| Beta (β) | Risk Level | Expected Return |
|---|
Common Beta Values by Industry
Typical beta ranges for different sectors:
| Industry / Sector | Typical Beta Range |
|---|---|
| Utilities (Electric, Gas, Water) | 0.3 - 0.5 |
| Consumer Staples (Food, Household) | 0.5 - 0.7 |
| Healthcare (Pharmaceuticals) | 0.7 - 1.0 |
| Telecommunications | 0.8 - 1.0 |
| Financials (Banks, Insurance) | 0.9 - 1.2 |
| Industrials (Manufacturing) | 1.0 - 1.3 |
| Consumer Discretionary (Retail) | 1.0 - 1.4 |
| Technology (Software, Hardware) | 1.2 - 1.5 |
| Energy (Oil & Gas) | 1.2 - 1.6 |
| Biotechnology | 1.4 - 2.0 |
| Small-Cap Growth Stocks | 1.5 - 2.5 |
Note: Beta values vary by company and change over time. Always check current beta from financial data providers.
What is CAPM?
The Capital Asset Pricing Model (CAPM) is a fundamental financial model used to determine the expected return on an investment based on its systematic risk. It establishes a linear relationship between risk and return.
E(Ri) = Rf + βi × (E(Rm) - Rf)
Where:
- E(Ri) - Expected return on investment i
- Rf - Risk-free rate (typically 10-year Treasury yield)
- βi - Beta of investment i (systematic risk)
- E(Rm) - Expected return of the market portfolio
- (E(Rm) - Rf) - Market risk premium
CAPM is widely used in finance for portfolio management, capital budgeting, and valuing securities. It provides a framework for understanding the trade-off between risk and expected return.
Understanding Beta
Beta < 1.0 - Lower Volatility (Defensive)
The stock is less volatile than the market. When the market moves 10%, this stock typically moves less than 10%. Example: A beta of 0.5 means the stock moves about half as much as the market. These are often utility companies, consumer staples, or established dividend stocks.
Beta = 1.0 - Market Average
The stock moves in line with the market. When the market goes up 10%, this stock typically goes up 10%. A well-diversified portfolio typically has a beta close to 1.0.
Beta > 1.0 - Higher Volatility (Aggressive)
The stock is more volatile than the market. When the market moves 10%, this stock typically moves more than 10%. Example: A beta of 1.5 means the stock moves about 50% more than the market. Technology stocks, small-cap growth stocks, and cyclical industries often have high betas.
Negative Beta - Inverse Relationship
The stock moves opposite to the market. When the market goes up, this stock tends to go down. This is rare but can occur with certain gold mining stocks, inverse ETFs, or hedging instruments.
Important: Beta is calculated using historical data (typically 2-5 years of returns) and may not accurately predict future volatility. Beta can change over time as a company's business model, leverage, or market conditions evolve.
The Security Market Line
The Security Market Line (SML) is a graphical representation of CAPM. It plots expected return (y-axis) against beta (x-axis). All properly priced securities should lie on the SML.
- On the line: The security is fairly priced according to CAPM
- Above the line: The security is undervalued (positive alpha) - generates more return than expected for its risk
- Below the line: The security is overvalued (negative alpha) - generates less return than expected for its risk
The SML starts at the risk-free rate (beta = 0) and passes through the market portfolio (beta = 1.0, return = market return). The slope of the SML is the market risk premium.
CAPM Assumptions and Limitations
Key Assumptions
- Investors are rational and risk-averse
- Markets are efficient and information is freely available to all investors
- No transaction costs or taxes
- Investors can borrow and lend at the risk-free rate
- Single-period investment horizon
- All investors have the same expectations
Limitations
- Historical beta may not predict future risk: Beta is backward-looking and assumes the past relationship between stock and market returns will continue
- Single-factor model: CAPM only considers systematic (market) risk. Multi-factor models like Fama-French include size and value factors for better accuracy
- Difficult to estimate market risk premium: The expected market return is not observable and must be estimated, leading to variation in CAPM results
- Risk-free rate changes: Treasury yields fluctuate, affecting CAPM calculations
- Not all risk is captured: Idiosyncratic (company-specific) risk, liquidity risk, and other factors are not included
Despite these limitations, CAPM remains a widely-used benchmark in finance for its simplicity and intuitive framework for understanding risk-return trade-offs.
Frequently Asked Questions
What is CAPM?
CAPM (Capital Asset Pricing Model) is a financial model that calculates the expected return on an investment based on its systematic risk (beta), the risk-free rate, and the expected market return. The formula is E(Ri) = Rf + Bi * (E(Rm) - Rf).
What is beta in CAPM?
Beta measures a stock's volatility relative to the overall market. A beta of 1.0 means the stock moves with the market. Beta > 1.0 indicates higher volatility (more risky), while beta < 1.0 indicates lower volatility (less risky). A beta of 1.5 means the stock is 50% more volatile than the market.
What is the risk-free rate?
The risk-free rate is the return on an investment with zero risk, typically represented by U.S. Treasury securities. The 10-year Treasury yield is commonly used as the risk-free rate in CAPM calculations, currently around 3-5%.
What is the market risk premium?
The market risk premium is the extra return investors expect from holding a risky market portfolio instead of risk-free assets. It equals Expected Market Return minus Risk-Free Rate. Historically, the U.S. equity market risk premium has averaged 7-9%.
What are the assumptions of CAPM?
CAPM assumes investors are rational and risk-averse, markets are efficient, there are no transaction costs or taxes, investors can borrow at the risk-free rate, and all investors have the same information and time horizon. These assumptions rarely hold perfectly in reality.
What are the limitations of CAPM?
CAPM relies on historical beta which may not predict future volatility, assumes a single-period model, ignores other risk factors beyond systematic risk, and requires estimation of the market risk premium which can vary significantly. Multi-factor models like Fama-French often provide more accurate results.
How is beta calculated?
Beta is calculated using regression analysis comparing a stock's returns to market returns over a period (typically 2-5 years). Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns). Most financial websites provide pre-calculated beta values.
What is alpha in relation to CAPM?
Alpha measures a stock's actual return versus its CAPM-expected return. Positive alpha means the stock outperformed expectations (good management, market inefficiency). Negative alpha means underperformance. Alpha = Actual Return - CAPM Expected Return.
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Privacy & Limitations
- All calculations run entirely in your browser -- nothing is sent to any server.
- Results are estimates for planning purposes and should not replace professional financial advice.
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CAPM Calculator FAQ
What is CAPM?
CAPM (Capital Asset Pricing Model) is a financial model that calculates the expected return on an investment based on its systematic risk (beta), the risk-free rate, and the expected market return. The formula is E(Ri) = Rf + Bi * (E(Rm) - Rf).
What is beta in CAPM?
Beta measures a stock's volatility relative to the overall market. A beta of 1.0 means the stock moves with the market. Beta > 1.0 indicates higher volatility (more risky), while beta < 1.0 indicates lower volatility (less risky). A beta of 1.5 means the stock is 50% more volatile than the market.
What is the risk-free rate?
The risk-free rate is the return on an investment with zero risk, typically represented by U.S. Treasury securities. The 10-year Treasury yield is commonly used as the risk-free rate in CAPM calculations, currently around 3-5%.
What is the market risk premium?
The market risk premium is the extra return investors expect from holding a risky market portfolio instead of risk-free assets. It equals Expected Market Return minus Risk-Free Rate. Historically, the U.S. equity market risk premium has averaged 7-9%.
What are the assumptions of CAPM?
CAPM assumes investors are rational and risk-averse, markets are efficient, there are no transaction costs or taxes, investors can borrow at the risk-free rate, and all investors have the same information and time horizon. These assumptions rarely hold perfectly in reality.
What are the limitations of CAPM?
CAPM relies on historical beta which may not predict future volatility, assumes a single-period model, ignores other risk factors beyond systematic risk, and requires estimation of the market risk premium which can vary significantly. Multi-factor models like Fama-French often provide more accurate results.
How is beta calculated?
Beta is calculated using regression analysis comparing a stock's returns to market returns over a period (typically 2-5 years). Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns). Most financial websites provide pre-calculated beta values.
What is alpha in relation to CAPM?
Alpha measures a stock's actual return versus its CAPM-expected return. Positive alpha means the stock outperformed expectations (good management, market inefficiency). Negative alpha means underperformance. Alpha = Actual Return - CAPM Expected Return.