CAPM Calculator
Estimate the cost of equity and expected return with the Capital Asset Pricing Model
Put the share's numbers in
Free. No sign-up. The answer updates as you type.
Two ways of saying the same thing. Pick whichever number you actually have, and the calculator carries it across if you switch.
What a safe government bond pays each year, the return you could have without taking real risk. Type 4 for 4%.
How hard this share swings when the market moves. 1 means in step with the market, 2 about twice as hard, 0.5 about half as hard.
The total return you expect from the market as a whole, safe rate included, not the extra part on top of it. Type 9 for 9% a year.
Return this share has to earn each year to be worth its risk
9.50%
According to the model, 9.50% a year is the least this share should earn for its risk to be worth taking: it is the same return you would expect from a mix of the safe bond and the whole market that swings as hard as this share does. If you are valuing the company, 9.50% is the rate to discount its future profits at, which analysts call the cost of equity.
The numbers behind that
What a safe bond pays
You typed it in. You could earn this without taking market risk, so the answer starts from here.
4.00%
Market return minus the safe rate
The 9.00% a year you expect from the whole market, minus the 4.00% a safe bond pays.
5.00%
This share's part, from its beta
This share's beta of 1.10 times the 5.00% in the row above. A beta of 1.10 says this share has swung harder than the market, both up and down.
5.50%
Return this share has to earn
4.00% plus 5.50%. So the model asks 9.50% a year from this share, more than the 9.00% a year you expect from the market as a whole.
9.50%
What moves the answer
Click a line to jump to the field it talks about.
- Beta is an estimate, and two providers can publish different ones for the same share. With a beta of 1.35 instead of 1.10, the answer would be 10.75%.
- If you expected 10.00% a year from the whole market instead of 9.00%, the answer would be 10.60%.
- If a safe bond paid 5.00% a year instead of 4.00%, and you still expected 9.00% from the whole market, the answer would be 9.40%.
On this tab the market figure already includes the safe rate. Raise the safe rate alone and the extra the market pays on top shrinks by the same amount.
What happens if the beta is different
Your own row is highlighted. Everything else on this page stays as you entered it and only the beta changes.
| Beta | Return asked each year | What that beta says about the share |
|---|---|---|
| 0.60 | 7.00% | Swings less than the market |
| 0.85 | 8.25% | Swings less than the market |
| 1.10yours | 9.50% | Swings harder than the market |
| 1.35 | 10.75% | Swings harder than the market |
| 1.60 | 12.00% | Swings harder than the market |
Across this table the beta moves from 0.60 to 1.60 and the required return moves by 5.00% a year with it. If the beta you found is only one provider's estimate, that is the width of the doubt sitting underneath your answer.
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return. It states that the return an investor should require on an asset equals the risk-free rate plus a premium proportional to the asset's beta, its sensitivity to the broader market.
E(R) = Rf + β × (Rm − Rf)
Step 1: In the first box, type what a safe government bond pays each year (the risk-free rate). The yield on a long-dated government bond such as the 10-year Treasury is the usual choice.
Step 2: Enter the stock's beta. You can find this on most financial data providers, or estimate it from historical returns.
Step 3: Pick the tab for the market figure you have: the yearly return you expect from the whole market (the calculator subtracts the safe rate for you), or only the extra return above a safe bond (the equity risk premium).
Step 4: Read the answer, the breakdown and the table of betas underneath. They all recalculate while you type, so there is no button to press and nothing left on screen from a previous set of numbers.
What Is the Capital Asset Pricing Model?
The Capital Asset Pricing Model (CAPM) is a foundational framework in finance that links the expected return of an asset to a single measure of risk, its sensitivity to the overall market. Developed in the 1960s building on the portfolio theory of Harry Markowitz, CAPM proposes that investors should only be rewarded for bearing systematic risk: the risk that cannot be diversified away by holding many different securities. Risk specific to one company can be eliminated through diversification, so the model assumes the market does not pay a premium for it.
In practice, CAPM is a widely used method for estimating the cost of equity, the return that shareholders require for investing in a company's stock rather than a risk-free alternative. That estimate then flows into broader valuation work: it is a key input to the weighted average cost of capital and, ultimately, to the discount rate used in discounted cash flow analysis.
The CAPM Formula and Its Components
E(R) = Rf + β × (Rm − Rf)
The risk-free rate (Rf) is the return available on an investment carrying essentially no default risk. In practice it is proxied by the yield on a government bond, commonly the 10-year U.S. Treasury, because such bonds are backed by the issuing government and roughly match the long horizon of equity investing. No real asset is perfectly risk-free, so the rate is an approximation rather than a guarantee.
Beta (β) measures how much an asset moves relative to the market. A beta of 1 means the asset tends to move in line with the market; a beta above 1 means it amplifies market moves and is more volatile; a beta below 1 means it is less volatile. Beta is usually estimated by regressing the asset's historical returns against a market index, which means it reflects past behaviour and can shift over time.
The term (Rm − Rf) is the equity risk premium, the extra return investors demand for holding the broad equity market instead of a risk-free asset. It is the reward for taking on market risk. Multiplying it by beta scales that reward up or down according to how much systematic risk the individual asset carries. Some analysts prefer to estimate the equity risk premium directly rather than subtracting the risk-free rate from an assumed market return, which is why this calculator supports both approaches.
How CAPM Feeds Into WACC and the DCF Discount Rate
The cost of equity produced by CAPM rarely stands alone. Most companies finance themselves with a mix of equity and debt, so analysts combine the cost of equity with the after-tax cost of debt to form the weighted average cost of capital (WACC). Each source is weighted by its share of the company's total capital, giving a single blended rate that represents the overall return the business must earn to satisfy all of its capital providers.
That WACC is then commonly used as the discount rate in a discounted cash flow (DCF) valuation, where projected future free cash flows are discounted back to present value. Because the CAPM output sits at the start of this chain, the assumptions you make about beta and the equity risk premium ripple through the entire valuation: a higher cost of equity raises the discount rate and lowers the estimated value of the business. You can move directly from this page to the WACC calculator and the DCF calculator to carry the cost of equity through each step.
Criticisms and Limitations of CAPM
CAPM is widely taught and widely used, but it rests on simplifying assumptions and has well-documented limitations. As a single-factor model, it explains expected returns using only one variable, market beta, and assumes that systematic risk is the sole priced risk. Empirical research has long suggested that other factors, such as company size and value characteristics, also help explain returns, which motivated multi-factor models that extend or compete with CAPM.
Beta itself is a practical weak point: it is estimated from historical data and can be unstable, varying with the time period, return frequency, and market index chosen. The model also assumes investors can borrow and lend at the risk-free rate and that markets are efficient, assumptions that do not fully hold in reality. Because of this, CAPM is best treated as a reasoned starting estimate of the cost of equity rather than a precise figure, and its inputs should be sense-checked against the specific company and market conditions.
That instability is the reason the calculator above shows a range of betas rather than a single figure. Two data providers can publish different betas for the same company on the same day, simply because one measured five years of monthly returns against one index and the other measured two years of weekly returns against another. Reading the answer as a band, and noticing how wide that band is, is closer to what the model can honestly tell you than reading one number to two decimal places.
Related Valuation Tools
CAPM is one link in a chain of valuation steps. Once you have a cost of equity, use the WACC calculator to blend it with the cost of debt, then carry that rate into the DCF calculator to discount projected cash flows to present value. For the underlying time-value-of-money mechanics, the present value calculator shows how any single future cash flow is discounted back to today.
Frequently Asked Questions About the CAPM Calculator
Beta measures how much a stock's price moves relative to the overall market. A beta of 1 means the stock tends to move in line with the market. A beta above 1 indicates the stock is more volatile than the market (it amplifies market moves), while a beta below 1 indicates it is less volatile. Beta is typically estimated by regressing the stock's historical returns against a market index, so it reflects past behaviour and can change over time.
The risk-free rate is usually proxied by the yield on a long-dated government bond, such as the 10-year U.S. Treasury, because such bonds carry minimal default risk and roughly match the long horizon of equity investments. Analysts generally match the bond's maturity to the time horizon of the valuation. No real asset is perfectly risk-free, so it is an approximation rather than a guaranteed rate.
CAPM is a widely used method for estimating the cost of equity, the return shareholders require for bearing the risk of owning a stock. That cost of equity is then one component of the weighted average cost of capital (WACC), alongside the after-tax cost of debt, weighted by each source's share of total capital. The resulting WACC is frequently used as the discount rate in a discounted cash flow (DCF) valuation.
Most brokerage platforms and financial data sites publish a beta in the key statistics or summary section of a stock's page, so in practice you can read it off rather than calculate it. If you want to work it out yourself, you compare the stock's returns with the returns of a market index over the same period and measure how much the stock moved for each move in the index. Whichever route you take, check what the figure is based on: the period used, how often returns are sampled, and which index they are compared against all change the result, which is why two providers can quote different betas for the same company on the same day.
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Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.