Capital Asset Pricing Model Calculator
The Capital Asset Pricing Model Calculator helps investors determine the expected return on an investment based on its risk relative to the market. It factors in the risk-free rate, the expected market return, and the asset's beta to provide a comprehensive understanding of potential returns and associated risks.
The formula for CAPM is: R = Rf + β × (Rm - Rf), where R is the expected rate of return, Rf is the risk-free interest rate, Rm is the broad market return, and β (beta) measures the asset's risk relative to the market.
To use the CAPM Calculator, simply input the Risk-free interest rate, Broad market return, and Beta in their respective fields. The calculator will automatically compute the risk premium and expected rate of return, displaying the results in a dedicated section below.
| Risk-free Interest Rate (Rf) % | Broad Market Return (Rm) % | Beta |
|---|---|---|
Capital Asset Pricing Model Results
| Risk Premium of the Asset % | Expected Rate of Return (R) |
|---|---|
| 0% | 0% |
Calculation Steps:
FAQs
What is the Capital Asset Pricing Model (CAPM)?
The Capital Asset Pricing Model (CAPM) is a financial model that establishes a relationship between the expected return of an asset and its risk. It helps investors evaluate potential investment returns against their associated risks.
How does CAPM work?
CAPM works by calculating the expected return on an investment based on the risk-free rate, the expected return of the market, and the asset's sensitivity to market movements (beta). It provides a benchmark for assessing investment performance.
What is Beta in CAPM?
Beta is a measure of an asset's volatility in relation to the overall market. A beta greater than 1 indicates that the asset is more volatile than the market, while a beta less than 1 suggests it is less volatile.
What does the risk-free rate represent?
The risk-free rate represents the return on an investment with no risk of financial loss, typically the yield on government bonds. It serves as a baseline for comparing potential investment returns.
Why is the expected return important?
The expected return is crucial for investors as it helps them assess whether an investment is worth the associated risks. It serves as a guide for making informed investment decisions and portfolio management.
What is market risk premium?
The market risk premium is the additional return that investors expect for taking on the risk of investing in the stock market over a risk-free rate. It is calculated as the difference between expected market return and the risk-free rate.
How is CAPM used in investment analysis?
CAPM is widely used in investment analysis to evaluate whether a stock or asset is fairly valued. By comparing the expected return against the required return, investors can identify potential investment opportunities.
Can CAPM predict stock prices?
While CAPM helps estimate expected returns, it does not predict stock prices directly. It provides a framework for understanding risk and return, which can aid in making more informed investment decisions.
What are the limitations of CAPM?
CAPM has limitations, including assumptions of market efficiency and constant beta. Real-world factors, such as market anomalies and changes in investor behavior, can affect its accuracy and reliability.
Is CAPM applicable to all investments?
CAPM is primarily used for stocks and portfolios. While it can provide insights into other investments, it may not be suitable for all asset classes, particularly those without market prices or liquidity.