CAPM Calculator (Capital Asset Pricing Model)

CAPM translates market risk into a required return. Enter a risk-free rate, a broad market return, and beta. The calculator subtracts the risk-free rate from the market return to get the market risk premium, multiplies that premium by beta to get the asset risk premium, and adds the result back to the risk-free rate.

This page is deliberately narrower than a full valuation model. It estimates expected or required return, often used as a cost of equity. That output can feed the WACC calculator, which blends equity and debt costs. WACC can then feed the DCF calculator, while the NPV calculator and IRR calculator use discount rates to evaluate projects. For market-based whole-company value, compare with the enterprise value calculator.

How the inputs work

The risk-free interest rate is the return assumption for an asset treated as default-free over the relevant horizon. Practitioners often use a government bond yield that matches the investment horizon. The broad market return is the expected return on the market portfolio or benchmark. The difference between those two rates is the market risk premium.

Beta scales the market risk premium. A beta of 0.47, the default, means the model assigns 47% of the market premium to the asset. A beta of 1 assigns the full premium. A beta of 1.5 assigns 150% of the premium. Negative beta can produce an expected return below the risk-free rate if it offsets market risk in the model.

The calculator accepts any finite numbers for the three inputs. It does not prevent negative rates or negative beta because those can be meaningful in some scenarios, but the interpretation should be handled carefully.

Formula

The Capital Asset Pricing Model is:

$\text{expected return} = \text{risk-free rate} + \beta\cdot\left(\text{market return} - \text{risk-free rate}\right)$

The market risk premium is:

$\text{market risk premium} = \text{market return} - \text{risk-free rate}$

The asset risk premium is:

$\text{asset risk premium} = \beta\cdot\text{market risk premium}$

The output labels the final number as required or expected return. In corporate finance, that number is often treated as the cost of equity because it represents the return equity investors require for bearing systematic risk.

Worked example using the default inputs

Assume a risk-free rate of 2.4%, a broad market return of 10%, and beta of 0.47. First, calculate the market risk premium:

$\text{market risk premium} = 10\% - 2.4\% = 7.6\%$

Next, scale that premium by beta:

$\text{asset risk premium} = 0.47\cdot7.6\% = 3.572\%$

Finally, add the beta-adjusted premium to the risk-free rate:

$\text{expected return} = 2.4\% + 3.572\% = 5.972\%$

Rounded to two decimals, the calculator reports 5.97%. It also displays the market risk premium of 7.60%, the asset risk premium of 3.57%, beta of 0.47, and the risk-free rate of 2.40%. Because the expected return is above the risk-free rate, the result tone is positive.

How CAPM is used in valuation and capital budgeting

CAPM is most often used to estimate cost of equity. In a DCF that discounts equity cash flows or EPS-style cash flows, cost of equity may be the appropriate discount rate. For FCFF, the cost of equity from CAPM is usually blended with after-tax debt cost in WACC. That distinction matters: equity cash flows go only to shareholders, while FCFF belongs to the whole firm before financing.

In project evaluation, CAPM can help set a hurdle rate when a project has equity-like market risk. A project tied closely to the broad market may deserve a beta near 1 or above. A project with stable, defensive cash flows may justify a lower beta. For a private company or division, analysts may estimate beta from comparable public companies and adjust for leverage.

CAPM also supports sensitivity analysis. If beta rises from 0.47 to 1.2 while the risk-free rate and market return stay at the defaults, expected return rises because more market risk premium is assigned to the asset. That higher required return lowers present values in NPV or DCF analysis.

Limitations and tips

CAPM is elegant but simplified. It assumes diversified investors care about systematic risk, that beta is a sufficient risk measure, and that the chosen market portfolio and risk-free rate are appropriate. Real-world returns can be affected by size, value, momentum, liquidity, leverage, taxes, regulation, and company-specific events.

Choose inputs consistently. Use nominal market return with nominal risk-free rate, or real with real. Match the risk-free maturity to the cash-flow horizon when possible. Recheck beta if a company has changed leverage, business mix, cyclicality, or operating model.

Treat the result as a required return, not a price target. CAPM tells you what return would compensate for modeled market risk. It does not say whether the stock is cheap or expensive. For that, combine the discount rate with cash-flow forecasts, market multiples, and business analysis.

Sources

• CFA Institute, Cost of Capital: Advanced Topics — cost of equity and CAPM context in valuation.
• Corporate Finance Institute, CAPM — capital asset pricing model formula and interpretation.
• 365 Financial Analyst, Corporate Finance Formulas — CFA-style formula reference including CAPM.