CAPM Calculator (Expected Return and Cost of Equity)
Enter the risk-free rate, the stock’s beta and the expected market return.
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CAPM Calculator (Expected Return and Cost of Equity) by TheCalcTools
How the CAPM Calculator (Expected Return and Cost of Equity) works
CAPM says an asset’s expected return is the risk-free rate plus beta times the market risk premium. Beta measures how much the asset moves with the market: 1.2 means about 20% more volatile.
Analysts use the CAPM return as the cost of equity in WACC and DCF valuations. The inputs are estimates, and the model is a simplification of real markets.
The formula
Worked example
Using the default values shown in the calculator:
| Risk-free rate | 4.2 % |
|---|---|
| Beta | 1.2 |
| Expected market return | 9 % |
| Return you expect from the stock (optional, for alpha) | 12 % |
- 4.2% + 1.2 × (9% − 4.2%) = 9.96%.
Result:
| Expected return (cost of equity) | 9.96% |
|---|---|
| Market risk premium | 4.80% |
| Risk premium for this stock | 5.76% |
| Alpha (your expectation − CAPM) | 2.04% |
Frequently asked questions
What risk-free rate should I use?
The yield on a government bond in the same currency, often the 10-year Treasury for US stocks.
Sources and further reading
- Wikipedia: Capital asset pricing model
- Aswath Damodaran (NYU Stern): Data on risk premiums and betas
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This calculator gives estimates for information only. It is not financial advice, and your lender's or provider's figures will govern. Rates, fees and rules vary. See our disclaimer.