CAPM Calculator

Formula

The formula used by the CAPM to calculate the expected return is:

\[ E(R_i) = R_f + [E(R_m) - R_f] \times \beta_i \]

Where:

\( E(R_i) \) is the expected return on the capital asset (%)
\( R_f \) is the risk-free rate (%)
\( E(R_m) \) is the expected return of the market (%)
\( \beta_i \) is the beta of the security

What is CAPM?

The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return on investment, considering the level of risk associated with that investment. It provides a framework for calculating the required rate of return based on the risk-free rate, the systematic risk of the investment (measured by beta), and the market risk premium.

The CAPM formula assumes that investors are rational and risk-averse, seeking to maximize their returns while minimizing risk exposure.

Example Calculation

Let's assume the following values:

Risk-Free Rate (Rf) = 2%
Expected Market Return (E(Rm)) = 8%
Beta (βi) = 1.2

Using the formula to calculate the Expected Return (E(Ri)):

\[ E(R_i) = 2\% + [8\% - 2\%] \times 1.2 = 9.2\% \]

The expected return on the capital asset is 9.2%.