Overview
Enter the risk-free rate, an asset's beta, and the expected market return to calculate its expected return under the Capital Asset Pricing Model (CAPM): E(R) = Rf + β × (Rm − Rf). The model starts from the risk-free rate (typically a government bond yield) as the baseline return with no risk, then adds a risk premium scaled by beta - a measure of how much the asset's returns move relative to the overall market. A beta of 1 means the asset is expected to earn exactly the market risk premium on top of the risk-free rate; a beta above 1 amplifies that premium (and losses), while a beta below 1 dampens it. The market risk premium itself (market return minus risk-free rate) is shown as an intermediate result since it's a commonly referenced figure on its own. Useful for estimating a stock's required or expected return for valuation models, or for coursework covering modern portfolio theory. Runs entirely client-side, and this is an informational estimate, not financial advice.
Best for: Estimating a stock's expected return for a valuation model or finance coursework
How to use this tool
- Enter the risk-free rate and beta. The risk-free rate is typically a government bond yield; beta measures the asset's volatility relative to the market.
- Enter the expected market return. The return expected from the overall market (e.g. a broad index) over the same period.
- Read the expected return. E(R) = Rf + β × (Rm − Rf), with the market risk premium shown as an intermediate value.
Frequently asked questions
A beta of 1 means the asset's returns are expected to move in line with the overall market - it earns exactly the market risk premium on top of the risk-free rate, no more and no less amplified.
Yes - a negative beta means the asset tends to move opposite the market (rare, but seen in some hedges or certain commodities). Under CAPM, that would subtract from the risk-free rate rather than add to it, since the market risk premium gets multiplied by a negative number.
No - CAPM is a theoretical model that estimates a required or expected return based on systematic (market) risk alone. Actual returns are affected by many factors the model doesn't capture, and this calculator produces an informational estimate, not a prediction or financial advice.