CAPM Calculator FAQ
What is CAPM used for?
CAPM is used to estimate the required return on equity given the risk-free rate, beta, and the expected market return. In practice, analysts use it to estimate the cost of equity for valuation, WACC, project screening, and investment analysis.
Can I use CAPM to calculate cost of equity?
Yes. One of the most common uses of CAPM is to calculate the cost of equity from the risk-free rate, beta, and market risk premium.
What is the CAPM formula?
The Capital Asset Pricing Model is usually written as E(r_i) = r_f + β_i(E(r_m) - r_f). The term E(r_m) - r_f is the market risk premium, and β_i scales that premium for the asset or stock you are analyzing.
How do I choose the risk-free rate for CAPM?
A common approach is to use a government bond yield in the same currency and with a similar time horizon as the valuation. For long-term equity valuation, analysts often start with a 10-year government bond yield. In practice, government bonds are not perfectly risk-free, but they are usually treated as the closest widely available benchmark for a near-riskless return in that market. The right benchmark still depends on the market and the duration of the cash flows you are discounting.
How do I choose the market risk premium?
The market risk premium is E(r_m) - r_f. In practice, analysts either start with a long-run equity market assumption and subtract the risk-free rate, or use a published market risk premium estimate for the relevant market. The important part is to keep the assumptions internally consistent with your currency, market, and valuation horizon.
What beta should I use in CAPM?
Use a beta that matches the company, asset, or project you want to value. For listed stocks, analysts often start with a historical or published regression beta. For private-company valuation, they may use peer betas and adjust them for leverage. A beta above 1 implies more market sensitivity than the broad market, while a beta below 1 implies less.
How do I use CAPM to calculate cost of equity?
To calculate cost of equity, enter the risk-free rate, beta, and expected market return, then solve for E(r_i). That result is the CAPM-implied required return on equity. It is often used as the equity component inside WACC.
Can this CAPM calculator solve for beta or market return too?
Yes. This tool can solve for any one missing variable, not just the final expected return. That means you can calculate β, r_f, E(r_m), or E(r_i) as long as the other three values are known.
What is a practical example of using CAPM?
Suppose you are valuing a company and need a discount rate for equity cash flows. You choose a 10-year government bond yield as r_f, estimate a beta from the company or peers, and assume an expected market return. CAPM then gives you a required return that can be used in DCF valuation, project appraisal, or capital budgeting.
What is the difference between CAPM and WACC?
CAPM estimates the cost of equity only. WACC combines the cost of equity with the cost of debt, weighted by capital structure. In many valuation models, CAPM is the step used first to estimate the equity return that later feeds into WACC.
How should I use this CAPM calculator?
First, decide which variable you want to solve for by selecting the radio button. Then enter the other three values, using consistent assumptions for currency, risk-free benchmark, beta, and market return. The calculator will show the main result plus the market risk premium and the beta-adjusted premium so you can see how the CAPM estimate is built.
Example
Suppose the risk-free rate is 4.42%, the stock beta is 1.49, and the expected market return is 11.00%. The market risk premium is 6.58%, and the beta-adjusted premium is about 9.80%.
Under those assumptions, CAPM gives an expected return of about 14.22%. That number can then be used as a required return for equity valuation, a hurdle-rate input, or the equity component in a broader WACC calculation.
