CAPM Calculator
Expected return on stock
CAPM Calculator
Expected Return = Rf + ฮฒ ร (Rm - Rf)
10-year government bond yield
Nifty/Sensex expected return (10-14%)
ฮฒ=1 = market average, ฮฒ>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 โ typically the 10-year government bond yield (India ~7%, US ~4%).
Step 2: Enter the Expected Market Return โ historical average return of Nifty/Sensex (10-14%) or S&P 500 (8-10%).
Step 3: Enter the stock's Beta (ฮฒ) โ 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
โ 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.
โ Stock Valuation
Use CAPM expected return as discount rate for DCF or Dividend Discount Model to calculate intrinsic value of stocks.
โ Portfolio Construction
Build efficient portfolios by selecting stocks with favorable expected returns relative to their risk (Beta).
โ 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% โ Expected Return = 7 + 0.6ร(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% โ Expected Return = 7 + 1.0ร(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% โ Expected Return = 7 + 1.5ร(12-7) = 14.5%. Higher expected return (14.5%) but with significantly higher risk. Suitable for aggressive investors.
CAPM Formula
E(R) = Rf + ฮฒ ร (Rm - Rf)
Where: Rf = Risk-Free Rate, ฮฒ = Beta, Rm = Market Return
Example: Rf=7%, ฮฒ=1.2, Rm=12% โ Expected Return = 7 + 1.2ร(5) = 13%
Limitations of CAPM
- โ ๏ธAssumes single risk factor: CAPM considers only market risk (Beta), ignoring company-specific risks like management quality, competition, regulatory changes.
- โ ๏ธUses historical Beta: Past volatility may not predict future risk. Beta can change significantly over time as company fundamentals change.
- โ ๏ธAssumes efficient markets: CAPM works best in efficient markets where prices reflect all available information. Less accurate in emerging markets like India.
- โ ๏ธRisk-free borrowing unrealistic: CAPM assumes investors can borrow at risk-free rate, which isn't true for retail investors who pay higher interest rates.
Frequently Asked Questions
Built and maintained by Sanjay Singh ยท Founder, Numrexo
Builds and maintains every calculator on Numrexo. Fifteen years working with numbers in real estate and digital marketing.
Last updated: ยท Calculations run in your browser. Nothing you enter is sent to us or stored.