Calculate expected return using the Capital Asset Pricing Model (CAPM). Visualize the Security Market Line and project investment growth.
The Capital Asset Pricing Model (CAPM) is a cornerstone of modern finance. It describes the relationship between systematic risk (measured by beta) and expected return for an asset. In essence, CAPM says that investors deserve to be compensated for two things: the time value of money (risk-free rate) and the risk they take (beta times the market risk premium).
The formula is elegantly simple: Expected Return = Risk-Free Rate + β × Market Risk Premium. This relationship defines the Security Market Line (SML), where every fairly priced asset should lie. Assets above the SML offer better returns for their risk level (positive alpha), while assets below it underperform.
This calculator lets you compute expected returns for any beta, compare multiple risk profiles on the SML, and project how your investment grows versus a risk-free alternative. It is essential for equity valuation (determining the cost of equity), setting hurdle rates for corporate projects, and evaluating whether a stock's historical returns justify its risk.
CAPM is used by every finance professional, from equity analysts setting price targets to CFOs evaluating capital allocation decisions. This calculator makes it easy to quickly compute expected returns and visualize where a stock sits on the Security Market Line relative to the market.
This tool is designed for quick, accurate results without manual computation. Whether you are a student working through coursework, a professional verifying a result, or an educator preparing examples, accurate answers are always just a few keystrokes away.
Expected Return = Rf + β × (Rm − Rf) Risk Premium = β × Market Risk Premium Future Value = Investment × (1 + Expected Return)^Years Where Rf = risk-free rate, β = beta, Rm = market return.
Result: Expected Return = 13.4%
With a risk-free rate of 5%, beta of 1.2, and market return of 12%, the expected return is 5% + 1.2 × (12% − 5%) = 5% + 8.4% = 13.4%. A $100,000 investment would grow to about $188,000 in 5 years at this rate.
Use consistent units throughout your calculation and verify all assumptions before treating the output as final. For professional or academic work, document your input values and any conversion standards used so results can be reproduced. Apply this calculator as part of a broader workflow, especially when the result feeds into a larger model or report.
Most mistakes come from mixed units, rounding too early, or misread labels. Recheck each final value before use. Pay close attention to sign conventions — positive and negative inputs often produce very different results. When working with multiple related calculations, keep intermediate values available so you can trace discrepancies back to their source.
Enter the most precise values available. Use the worked example or presets to confirm the calculator behaves as expected before entering your real data. If a result seems unexpected, compare it against a manual estimate or a known reference case to catch input errors early.
It is the return on a theoretically zero-risk investment, usually proxied by government bonds like the US 10-year Treasury yield. Use this as a practical reminder before finalizing the result.
Beta measures a stock's sensitivity to market movements. β=1 means market-level risk; β>1 means more volatile than the market.
It is the expected return of the market minus the risk-free rate — the extra return investors demand for bearing market risk. Historically, it has been 5-7%.
CAPM assumes rational investors, efficient markets, and that beta captures all risk. In reality, size, value, and momentum factors also affect returns.
CAPM provides the cost of equity for discounted cash flow (DCF) models. It sets the discount rate used to calculate the present value of future cash flows.
Yes. By comparing actual return with CAPM-predicted return, you can calculate alpha — the portfolio's risk-adjusted outperformance.