Calculate CAPM expected return or required return from risk-free rate, beta, expected market return, or market risk premium.
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Quick examples
Formula
CAPM required return = risk-free rate + beta × market risk premium.
If you enter expected market return, the calculator subtracts the risk-free rate to find the market risk premium. If you enter the premium directly, it adds it back to show the implied market return.
CAPM required return for this beta, which is also the cost of equity starting point in many valuation models.
Return spread check
Entered comparison return
12%
Alpha spread vs CAPM
0.9%
The entered return is above the CAPM required return, so the spread is positive before deeper valuation checks.
Beta risk band
Market-like beta
The asset moves close to the benchmark, so its required return should sit near the broad market return.
Security Market Line checkpoints
Beta 0.5
7.25%
CAPM-implied return at this systematic risk level.
Beta 1
10%
CAPM-implied return at this systematic risk level.
Beta 1.5
12.75%
CAPM-implied return at this systematic risk level.
Beta sensitivity
| Scenario | Beta | Required return |
|---|---|---|
| -0.25 beta | 0.95 | 9.73% |
| Current beta | 1.2 | 11.1% |
| +0.25 beta | 1.45 | 12.48% |
Interpretation
A beta of 1.0 should land on the market return, a beta below 1.0 should demand less than the market, and a beta above 1.0 should demand more. Use the alpha spread to compare your own expected return with the CAPM required return, not as a guarantee of actual future performance.
The same CAPM output is often used as a cost-of-equity input for WACC and discounted cash flow work. Keep the risk-free rate, beta, and market risk premium consistent with the same currency, market benchmark, and investment horizon.
Investment Theory
The Capital Asset Pricing Model (CAPM) calculates the expected return or required return of an asset based on its systematic risk (beta) relative to the overall market.
CAPM links expected return to systematic (non-diversifiable) risk. The model assumes investors are compensated only for bearing market risk, not for idiosyncratic risk that can be diversified away.
The model provides a benchmark expected return: if an asset’s actual expected return exceeds the CAPM prediction, it plots above the Security Market Line (SML) and may be undervalued.
The CAPM equation has three inputs. This capm formula explanation shows how the entered values flow into the main result and the supporting figures the calculator returns. In practice, the calculator applies this capm relationship to the user inputs, keeps the units and assumptions consistent, and then surfaces the supporting context needed to interpret the output responsibly.
E(Ri) = Rf + βi × (E(Rm) − Rf)
Rf = risk-free rate, βi = asset beta, E(Rm) = expected market return, (E(Rm) − Rf) = equity risk premium.
Risk-free rate 4.5%, beta 1.2, expected market return 10%. ERP = 10% − 4.5% = 5.5%. Expected return = 4.5% + 1.2 × 5.5% = 11.1%. The example section should make the workflow concrete, so this page keeps the arithmetic tied to a plausible scenario rather than leaving the result as an abstract formula.
CAPM assumes markets are efficient, investors are rational mean-variance optimisers, and there are no taxes or transaction costs. Beta is estimated from historical data and may not persist. The equity risk premium is debated and varies by estimation method (historical average, survey-based, implied from market prices).
Start with the risk-free rate, which is often taken from a government bond yield that matches the horizon of the analysis. Next, enter beta for the stock or asset you are evaluating. Finally, choose the expected market return you want to compare against.
If you already work with a market risk premium rather than a broad market return, switch the market assumption input and enter the premium directly. The calculator will still show the implied market return so the assumptions remain transparent.
If you are using CAPM to think about cost of equity, the output is the return shareholders would require for taking on that level of systematic risk. If you are using it for a stock-screening exercise, the same number becomes a benchmark for whether the return you expect looks adequate for the risk. Add an actual, forecast, or target return to see the alpha spread versus the CAPM required return.
A common search intent behind a CAPM calculator is not just “what is the formula?” but “is this return enough for the risk?” The optional comparison return answers that by subtracting the CAPM required return from your own expected return, analyst forecast, project hurdle rate, or realised return.
A positive spread means the entered return is above the CAPM benchmark on the current assumptions. A negative spread means the asset or project does not clear the model’s required return. This comparison is sometimes described as alpha, but it should be interpreted cautiously because CAPM is a single-factor model and beta estimates can change.
CAPM can be entered as risk-free rate plus beta times the market risk premium, or as risk-free rate plus beta times expected market return minus risk-free rate. Both versions are equivalent if the same assumptions are used.
Entering the market risk premium directly can reduce confusion when you already have an equity risk premium estimate from valuation work. Entering expected market return is often easier for classroom examples and simple investment comparisons. The important rule is consistency: use a risk-free rate and market premium that are in the same currency, market, and time horizon.
The Security Market Line (SML) is the graphical form of CAPM. Assets with beta below 1.0 should sit below the market return on the line, assets with beta of 1.0 should align with the market return, and assets above 1.0 should require a higher return to compensate for more market sensitivity.
That is why this calculator shows SML checkpoints alongside the headline result. A beta of 0.5, 1.0, or 1.5 should produce a clean progression if the market risk premium is positive. If the checkpoints do not behave that way, the inputs deserve a second look.
In corporate finance, CAPM often feeds directly into cost of equity. That makes the output useful for WACC, DCF analysis, and hurdle-rate setting. The CAPM result is not a promise of what the stock will actually earn; it is the return investors may demand given the asset’s systematic risk.
Because the same equation is used in valuation and capital-budgeting workflows, it is common to compare CAPM against cost-of-equity calculators, beta calculators, and WACC tools to make sure the assumptions are internally consistent.
Use the same currency for the risk-free rate, market return, and cash flows you plan to value. For example, a US-dollar DCF should not mix a US equity beta with a sterling risk-free rate unless the rest of the valuation has been converted consistently.
Use a beta that matches the asset being valued. Levered equity beta belongs with equity cost of capital, while unlevered beta is usually relevered before it is used for a specific company’s cost of equity. For portfolio analysis, make sure the benchmark used to estimate beta is the same benchmark implied by the market return or market risk premium.
Frequently asked questions
The yield on a government bond matching the investment horizon — typically the 10-year US Treasury for equity analysis. For shorter horizons, use 3-month T-bills.
Historical US equity risk premiums range from 4% to 7% depending on the measurement period. Damodaran’s annually updated estimates are widely used in practice.
Beta measures the sensitivity of an asset’s returns to market returns. Beta > 1 means the asset amplifies market moves; beta < 1 means it dampens them; beta = 0 means no market sensitivity.
It provides a simple, intuitive framework and is the standard benchmark in corporate finance, regulation, and valuation. More complex models (Fama-French 3-factor, APT) exist but require more inputs and are harder to implement.
Expected return is the CAPM output for the asset you are analysing. Market return is the return you expect from the benchmark market as a whole. CAPM combines those inputs with beta to estimate the asset's required return, so the expected return can be below, near, or above the market return depending on beta.
If you use expected market return, the calculator subtracts the risk-free rate internally to get the market risk premium. If you already think in spread terms, the market risk premium is just the market return minus the risk-free rate. Both approaches are mathematically equivalent when the assumptions are consistent.
Yes. A negative beta means the asset has historically moved opposite the market on average. That is uncommon for ordinary operating companies, but it can happen with hedges, inverse funds, or unusual samples. In CAPM, a negative beta can produce an expected return below the risk-free rate.
CAPM is commonly used to estimate the cost of equity inside WACC. Once you have a cost of equity estimate, you blend it with the after-tax cost of debt and the capital structure weights to get WACC for valuation or project screening.
Because beta, the market return assumption, and the risk-free rate can all be estimated differently. One site may use a 10-year Treasury, another a shorter bond yield, and another a different market return assumption. CAPM is only as consistent as the inputs behind it.
Alpha is the difference between the return you enter for comparison and the CAPM required return. A positive alpha spread means your forecast or actual return is above the CAPM benchmark on these assumptions; a negative spread means it is below. It is a screening signal, not proof that the asset is undervalued.
In many CAPM examples the output is called expected return, but practitioners often use it as a required return or cost of equity. The distinction matters: your own forecast return may differ from the model’s required return, which is why the calculator lets you compare the two.
Use market return if you are following the textbook CAPM equation with expected market return minus the risk-free rate. Use market risk premium if you already have an equity risk premium estimate from valuation research. The calculator supports both and keeps the implied market return visible.
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