CAPM (Capital Asset Pricing Model) Calculator

Risk-free Rate (Rf %):
Expected Market Return (E(Rm) %):
Beta (β):

Expected Return (E(Ri) %):

 

Introduction

The Capital Asset Pricing Model (CAPM) is a widely used financial tool that helps investors assess the expected returns on an investment. It takes into account risk factors such as the risk-free rate, market returns, and a stock’s beta. Calculating CAPM manually can be complex, but with our CAPM Calculator, you can quickly determine the expected return on your investment. This article will guide you through how to use the calculator, the formula behind it, provide an example, answer some frequently asked questions, and conclude with the benefits of using this tool.

How to Use

Our CAPM Calculator simplifies the process of calculating expected returns. Follow these steps:

1. Enter the risk-free rate (Rf) as a percentage.
2. Input the expected market return (E(Rm)) as a percentage.
3. Provide the stock’s beta (β).
4. Click the ‘Calculate’ button.
5. The calculator will display the expected return (E(Ri)) as a percentage.

Formula

The CAPM formula is used to calculate the expected return (E(Ri)) for a stock, and it is as follows: $E(Ri)=Rf+[E(Rm)-Rf]\times \beta i$

Where:

• $E(Ri)$ is the expected return of the stock.
• $Rf$ is the risk-free rate.
• $E(Rm)$ is the expected market return.
• $\beta i$ is the beta of the stock.

Example

Suppose you have the following values:

• Risk-free rate (Rf): 2%
• Expected market return (E(Rm)): 10%
• Beta (βi): 1.2

Using the formula, you can calculate the expected return: $E(Ri)=2$

So, the expected return for this stock is 10.6%.

FAQ’s

Q1: What is the risk-free rate?

A1: The risk-free rate represents the theoretical return on an investment with no risk, typically based on government bonds.

Q2: What does beta (β) signify?

A2: Beta measures a stock’s volatility in relation to the overall market. A beta of 1 means the stock’s returns move in line with the market.

Conclusion

Our CAPM Calculator provides a user-friendly way to calculate the expected return on your investments, saving you time and effort. By using this tool, you can make more informed investment decisions and assess the potential return for a particular stock. Understanding CAPM is crucial for investors, and with this calculator, you have a powerful resource at your disposal.