The capital asset pricing model says investors should be paid for systematic (market) risk only. It is the most common way to estimate the cost of equity for WACC and DCF valuations, though real returns often deviate from it.
How to use the CAPM Calculator: Capital Asset Pricing Model
- Risk-free rate
- Beta (β)
- Expected market return
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the risk-free rate, the stock’s beta and the expected market return.
Inputs explained
| Field | What to enter |
|---|---|
| Risk-free rate | In % |
| Beta (β) | A number |
| Expected market return | In % |
What each result means
- Market risk premium = [Expected market return] – [Risk-free rate]
- Stock risk premium = [Beta (β)]×([Expected market return] – [Risk-free rate])
- Expected return (cost of equity) = [Risk-free rate] + [Beta (β)]×([Expected market return] – [Risk-free rate])
Example values
How the main result changes when Risk-free rate changes and everything else stays at the example values above:
| Risk-free rate (%) | Expected return (cost of equity) (%) |
|---|---|
| 2.1 | 10.98 |
| 3.15 | 10.77 |
| 4.2 | 10.56 |
| 5.25 | 10.35 |
| 6.3 | 10.14 |
| 8.4 | 9.72 |
Formula
Expected return = risk-free rate + β × (expected market return − risk-free rate)
Market risk premium = market return − risk-free rate
Worked example
Inputs: Risk-free rate: 4.2 %; Beta (β): 1.2; Expected market return: 9.5 %.
Results: Market risk premium = 5.3 %; Stock risk premium = 6.36 %; Expected return (cost of equity) = 10.56 %.
Frequently asked questions
What risk-free rate should I use?
The yield on a long-term government bond, such as the 10-year U.S. Treasury.
What is a typical market risk premium?
Around 4–6% for the U.S. market.
Is CAPM accurate?
It's a useful benchmark, but actual returns often differ from its predictions.