CAPM Calculator
Expected return on stock
CAPM Calculator
Expected Return = Rf + β × (Rm - Rf)
10-year government bond yield
Nifty/Sensex expected return (10-14%)
β=1 = market average, β>1 = higher risk/return
CAPM Result
About CAPM Calculator
The Capital Asset Pricing Model (CAPM) Calculator helps investors calculate the expected return of a stock based on its risk level. Developed by William Sharpe in the 1960s (Nobel Prize-winning work), CAPM remains one of the most widely used models in finance for estimating required returns and valuing risky assets.
Whether you're evaluating individual stocks, building a portfolio, or analyzing investment opportunities, CAPM provides a systematic way to determine if a stock offers adequate return for its risk. The model considers three key inputs: risk-free rate, expected market return, and the stock's Beta (volatility relative to market).
How to Use This CAPM Calculator
Step 1: Enter the current Risk-Free Rate — typically the 10-year government bond yield (India ~7%, US ~4%).
Step 2: Enter the Expected Market Return — historical average return of Nifty/Sensex (10-14%) or S&P 500 (8-10%).
Step 3: Enter the stock's Beta (β) — available on Yahoo Finance, Moneycontrol, or your brokerage platform.
Step 4: Click "Calculate Expected Return" to see the CAPM result and risk analysis.
Step 5: Use the Reset button to clear all inputs and analyze a different stock.
Why Use CAPM for Investment Analysis
✓ Risk-Adjusted Returns
CAPM tells you if a stock's expected return adequately compensates for its risk. Higher Beta stocks must offer higher returns to be worthwhile.
✓ Stock Valuation
Use CAPM expected return as discount rate for DCF or Dividend Discount Model to calculate intrinsic value of stocks.
✓ Portfolio Construction
Build efficient portfolios by selecting stocks with favorable expected returns relative to their risk (Beta).
✓ Performance Evaluation
Calculate Alpha = Actual Return - Expected Return. Positive Alpha indicates manager skill or undervalued stock.
Beta Interpretation Guide
| Beta Range | Risk Level | Example Sectors | Interpretation |
|---|---|---|---|
| < 0.5 | Very Low | Utilities, Consumer Staples | Defensive, stable during downturns |
| 0.5 - 1.0 | Low | Large-cap, Healthcare | Less volatile than market |
| 1.0 | Market Average | Index Funds, Diversified | Moves exactly with market |
| 1.0 - 1.5 | High | Technology, Financials | More volatile than market |
| > 1.5 | Very High | Small-cap, Crypto, Growth | Speculative, high risk/reward |
Real-World CAPM Examples
Example 1: Defensive Stock (Beta = 0.6)
Risk-Free Rate = 7%, Market Return = 12% → Expected Return = 7 + 0.6×(12-7) = 10%. Lower return than market (12%) but with much lower risk. Suitable for conservative investors.
Example 2: Average Stock (Beta = 1.0)
Risk-Free Rate = 7%, Market Return = 12% → Expected Return = 7 + 1.0×(12-7) = 12%. Exactly matches market return with market-average risk.
Example 3: Aggressive Growth Stock (Beta = 1.5)
Risk-Free Rate = 7%, Market Return = 12% → Expected Return = 7 + 1.5×(12-7) = 14.5%. Higher expected return (14.5%) but with significantly higher risk. Suitable for aggressive investors.
CAPM Formula
E(R) = Rf + β × (Rm - Rf)
Where: Rf = Risk-Free Rate, β = Beta, Rm = Market Return
Example: Rf=7%, β=1.2, Rm=12% → Expected Return = 7 + 1.2×(5) = 13%
Limitations of CAPM
- ⚠️Assumes single risk factor: CAPM considers only market risk (Beta), ignoring company-specific risks like management quality, competition, regulatory changes.
- ⚠️Uses historical Beta: Past volatility may not predict future risk. Beta can change significantly over time as company fundamentals change.
- ⚠️Assumes efficient markets: CAPM works best in efficient markets where prices reflect all available information. Less accurate in emerging markets like India.
- ⚠️Risk-free borrowing unrealistic: CAPM assumes investors can borrow at risk-free rate, which isn't true for retail investors who pay higher interest rates.