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Capital Asset Pricing Model

Calculate expected returns using CAPM.

Capital Asset Pricing Model Calculator

CAPM Parameters

Risk-Free Rate (%)

Return on risk-free securities (e.g., Treasury bonds)

Risk-free rate cannot be negative

Market Return (%)

Expected return of the overall market (e.g., S&P 500)

Market return should exceed risk-free rate

Beta (β)

Measure of systematic risk relative to the market

β = 1.0: Same risk as market

β > 1.0: More volatile than market

β < 1.0: Less volatile than market

Portfolio Analysis (Optional)

Investment Amount ($)

Amount to invest for return calculations

Investment Period (Years)

Time horizon for investment

About CAPM

CAPM calculates the expected return of an asset based on its systematic risk.

It assumes investors are compensated for time value of money and risk.

Higher beta means higher expected return but also higher risk.

CAPM Analysis

Expected Return

Based on CAPM formula

Risk-Free Rate:

Market Return:

Market Risk Premium:

Beta (β):

Risk Premium:

Risk Assessment

Risk Level:

Beta Interpretation:

Volatility:

Investment Projections

Initial Investment:

Expected Annual Return:

Expected Value After Years:

Total Expected Gain:

Beta Sensitivity Analysis

Expected Returns by Beta

Risk-Return Trade-off

Conservative (β < 1.0)

Lower risk, lower expected return

Less volatile than market

Suitable for risk-averse investors

Market Risk (β = 1.0)

Same risk as market

Expected return equals market return

Diversified portfolio behavior

Aggressive (β > 1.0)

Higher risk, higher expected return

More volatile than market

Suitable for risk-tolerant investors

Market Scenario Analysis

Market Return Scenarios

Portfolio Value Impact

Understanding CAPM

What is CAPM?

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets.

It helps investors understand the minimum return they should expect for taking on investment risk.

CAPM is widely used in finance for pricing risky securities and generating expected returns.

Key Assumptions

Efficient Markets: All investors have access to the same information

Rational Investors: Investors are risk-averse and seek to maximize returns

No Transaction Costs: No fees or taxes affect investment decisions

CAPM Formula

Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Risk-Free Rate: Return on government bonds (typically 10-year Treasury)

Beta: Measure of systematic risk relative to the market

Market Risk Premium: Additional return for taking market risk

Beta Interpretation

β = 0: Risk-free asset

β < 1: Less risky than market

β = 1: Same risk as market

β > 1: Riskier than market

CAPM Applications

• Portfolio optimization

• Cost of equity calculation

• Investment performance evaluation

• Risk-adjusted returns

Limitations

• Assumes perfect markets

• Beta may not be stable

• Single-factor model

• Historical data dependency

Important Considerations

• CAPM provides theoretical expected returns, not guaranteed returns
• Beta is calculated using historical data and may not predict future risk
• Market conditions and company fundamentals can change
• Consider using CAPM alongside other valuation methods
• Diversification can help reduce unsystematic risk not captured by beta

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