CAPM Calculator — Capital Asset Pricing Model

Formula

How this is calculated

The Capital Asset Pricing Model (CAPM) describes the relationship between an asset's expected return and its systematic risk (beta). The formula E(R) = Rf + β × (Rm − Rf) has three components. Rf is the risk-free rate — the return available on a "safe" investment, usually approximated by the current yield on a 10-year government bond in the relevant market. Rm is the expected return of the broad market portfolio. The difference (Rm − Rf) is the market risk premium: the extra return investors demand for holding the risky market over the risk-free asset. Beta (β) scales that premium by how much the specific asset moves relative to the market: β = 1 means the asset tracks the market exactly; β = 1.5 means it moves 50% more; β = 0.5 is half as volatile; β < 0 means it tends to move opposite the market (rare).

The plot shows the Security Market Line (SML) — the line of E(R) values for every possible beta at these inputs. An asset sitting exactly on the SML is fairly priced by CAPM theory; one above the line offers more return than its risk demands (potentially undervalued); one below is potentially overvalued.

CAP is a theoretical framework with well-known limitations: it assumes markets are efficient and frictionless, all investors hold the same diversified market portfolio, and risk is fully captured by a single factor (beta). In practice, asset pricing depends on additional factors (value, momentum, size — the Fama–French factors) and betas are estimated from historical data with significant uncertainty. Use CAPM results as one input in your analysis rather than a precise prediction.