The Capital Asset Pricing Model (CAPM) is the standard formula finance professionals use to ask a simple question: given how risky a stock is, what return should I demand for owning it? This CAPM calculator plugs your numbers into Sharpe's classic equation — expected return equals the risk-free rate plus beta times the equity risk premium — and shows both the percentage result and the dollar value of that expected return on your portfolio.
Whether you are valuing a company's cost of equity, screening whether a fund's long-term target makes sense, or stress-testing your own required return on a volatile position, the model strips the decision down to three inputs: the safe rate, the stock's beta, and the market's expected return. Adjust any slider and the result updates instantly.
How to Use
- Enter the Risk-Free Rate. In practice this is the yield on a 10-year U.S. Treasury note — recently around 4%–5% — because it is the return you could earn with essentially zero default risk.
- Set the Stock Beta. A beta of 1.0 means the stock moves in line with the overall market; 1.5 means it swings 50% harder; 0.5 means it is half as volatile. Defensive utilities sit below 1.0, while tech and growth names often run at 1.2–1.8.
- Enter the Expected Market Return. Most analysts use the long-run annual return of a broad index such as the S&P 500, roughly 10% nominal before inflation, or about 6%–7% after inflation.
- Optionally add an Investment Amount to see what the expected return means in dollars on your actual position.
The result card shows the equity risk premium (the extra return the market pays you for taking risk), the beta-adjusted risk premium, and the headline expected return — which doubles as the required return on equity, or cost of equity, for valuation work.
The CAPM Formula
The equation, first published by William Sharpe in 1964, is:
E(Rᵢ) = R𝒻 + βᵢ × (Rₘ − R𝒻)
Where:
- E(Rᵢ) is the expected (required) return on the asset.
- R𝒻 is the risk-free rate.
- βᵢ is the asset's beta, its sensitivity to market moves.
- Rₘ is the expected return of the whole market.
- Rₘ − R𝒻 is the equity risk premium — the reward the market offers for bearing systematic risk.
Worked example with the defaults: R𝒻 = 4.5%, β = 1.2, Rₘ = 10.0%. The equity risk premium is 5.5%; multiplied by beta it contributes 6.6%; added to the 4.5% safe rate gives an expected return of 11.1% per year. On a $100,000 position that is about $11,100 of expected annual compensation for the risk you are taking.
The deeper idea is that only systematic, market-wide risk deserves reward. Diversifiable company-specific risk (a product launch failing, an executive quitting) can be eliminated by holding 30 or 40 stocks, so the market does not pay you for it. Beta measures exactly the non-diversifiable part.
Reading Your Output
- Equity Risk Premium — the gap between what stocks return and what Treasuries pay. If you believe stocks will return 10% and Treasuries pay 4.5%, the premium is 5.5 points. Raise this number and every stock's required return rises with it.
- Risk Premium (β × ERP) — your stock's amplified share of that premium. A beta above 1 magnifies it; a beta below 1 shrinks it.
- Expected Return / Cost of Equity — the minimum annual return you should accept to hold this stock instead of putting the money in bonds or an index fund. In corporate finance this same number is the discount rate a company's own investors demand — the cost of equity used in WACC and DCF models.
- Expected Annual Dollar Return — the percentage applied to the dollar amount you entered, so you can compare it directly against other investments.
Examples
Example 1 — A typical growth stock. With a 4.5% risk-free rate, 10.0% market return, and a beta of 1.2, the equity risk premium is 5.5% and the required return is 11.1%. A $100,000 position should expect roughly $11,100 per year to justify its risk.
Example 2 — A defensive utility. A regulated power company might carry a beta of 0.5. With the same 4.5% safe rate and 10.0% market return, its required return falls to 7.25% — barely above bonds, which is exactly why investors tolerate lower yield from defensive shares.
Example 3 — A high-volatility name. A beta of 1.8 pushes the required return to 14.4%. If an analyst projects only 9% earnings growth for that stock, CAPM says the risk is not being adequately rewarded — a classic red flag in screening.
Example 4 — Large portfolio stress test. On a $1,000,000 diversified portfolio with beta 1.5, the model expects 12.75%, or about $127,500, per year. Comparing that expectation against your actual statements shows whether your portfolio has been running ahead of or behind its risk profile.
FAQ
What does CAPM stand for?
CAPM stands for the Capital Asset Pricing Model, developed by William Sharpe in 1964. It describes the relationship between systematic (non-diversifiable) risk and the expected return of stocks, and it remains the most widely taught cost-of-equity formula in corporate finance and the CFA curriculum.
How do I calculate expected return with CAPM?
Take the risk-free rate, add beta multiplied by the equity risk premium. The equity risk premium is the expected market return minus the risk-free rate. In formula form: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate). Enter those three values above and this calculator does the arithmetic instantly.
What is a good beta for a stock?
There is no "good" beta in the abstract. Beta 1.0 means average market risk; below 1.0 (utilities, consumer staples) means steadier but lower expected returns; above 1.0 (tech, biotech, cyclicals) means higher expected return but deeper drawdowns in bear markets. Match the beta to the risk you can actually tolerate.
What risk-free rate should I use?
The standard choice is the current yield on the 10-year U.S. Treasury note, because it is considered essentially default-free and matches a typical long investment horizon. In periods of unusual yield-curve shape, some analysts prefer the 3-month T-bill rate, but the 10-year note is the convention for equity valuation.
What is the equity risk premium?
The equity risk premium (ERP) is the extra return investors demand for holding a broad stock market portfolio instead of risk-free government bonds. In this calculator it is simply Expected Market Return minus Risk-Free Rate. Forward-looking estimates in the U.S. typically cluster between 4% and 6%.
Is CAPM the same as the cost of equity?
Yes — for most practical valuation work, the CAPM output is the cost of equity. A company's shareholders expect the return CAPM prescribes for that company's beta; that required return becomes the equity component of the weighted average cost of capital (WACC) used to discount future cash flows.
What does a negative beta mean?
A negative beta means the asset tends to rise when the broad market falls — classic examples are gold miners or long-dated government bonds in certain regimes. CAPM then predicts a required return below the risk-free rate, because the asset acts as insurance for the rest of the portfolio. It is unusual for individual operating stocks.
What are the limitations of CAPM?
CAPM assumes investors can borrow and lend freely at the risk-free rate, that markets are efficient, and that a single beta fully captures risk. It ignores liquidity, size, value, quality, and momentum effects that decades of research (Fama-French among others) have shown matter in practice. Treat its output as a disciplined starting point, not a precise forecast.
Disclaimer
This CAPM calculator is provided for informational purposes only and does not constitute investment, financial, tax, or legal advice. The result is a mechanical application of the Capital Asset Pricing Model to the assumptions you enter; expected returns are not guarantees, and beta values change over time. Historical market returns do not predict future performance. Always make investment decisions based on your own research, risk tolerance, and a consultation with a qualified financial advisor.