Last updated October 13, 2026 · Report an error
The Capital Asset Pricing Model (CAPM) estimates the return investors should expect from a stock given its risk relative to the overall market. It's one of the most widely used models for estimating a company's cost of equity.
How it works
Enter the risk-free rate (%, typically a government bond yield), the stock's beta (its volatility relative to the market), and the expected market return (%). The calculator finds the equity risk premium (market return minus risk-free rate) and applies Re = Rf + β × (Rm − Rf).
- Enter risk-free rate (Rf) (%).
- Enter beta (β).
- Enter expected market return (Rm) (%).
- Click Calculate to see your results.
Examples
A moderately volatile stock
With a 3% risk-free rate, a beta of 1.2, and an 8% expected market return, the equity risk premium is 5% and the expected return works out to 9% — higher than the market's own 8%, since the stock is more volatile than the market (beta > 1).
Who should use it
- Estimating cost of equity for a WACC/valuation calculation.
- Finance coursework on risk and expected return.
Industry applications
- Corporate finance and valuation
- Investment analysis and portfolio management
Advantages
- Simple, widely-taught, widely-used model for estimating expected return.
- Directly usable as a cost-of-equity input for WACC.
Limitations
- Relies on simplifying assumptions (efficient markets, a single risk factor) that real markets don't perfectly satisfy.
Common mistakes to avoid
- Using a stale or mismatched risk-free rate and market-return period (e.g. a short-term rate with a long-term market return estimate).
- Treating CAPM's output as a guaranteed return rather than a theoretical estimate based on historical risk relationships.
Best practices
- Use a risk-free rate and expected market return from the same, consistent time horizon.
- Remember beta is typically estimated from historical price data, so it reflects the past — not a guarantee of future volatility.
Tips
- Feed this calculator's expected-return output straight into the WACC Calculator's cost-of-equity field for a complete cost-of-capital estimate.