CAPM Expected Return Calculator
Estimate a model cost of equity from a risk free rate, beta, and expected market return. See each CAPM component and test signed assumptions.
Earlier editorial review
- Reviewed
- 2026-09-18
- Methodology
- 1.1
Sources
How the CAPM estimate works
The Capital Asset Pricing Model estimates an expected return from three inputs. The equity risk premium is expected market return minus the risk free rate. CAPM multiplies that premium by beta, then adds the risk free rate: expected return = risk free rate + beta × equity risk premium. Rates are entered as annual percentage values, while beta is unitless.
This calculator uses the beta and market return that you enter. It does not estimate beta from prices or decide which market premium is appropriate. A beta of zero leaves the estimate equal to the risk free rate. A negative beta is accepted and reverses the sign of the beta contribution when the premium is positive.
Use comparable annual assumptions for the same currency and valuation horizon. CAPM is often one input to a cost of equity estimate for a valuation. The output is a model result based on your assumptions, not a promised investment return or a buy or sell signal.
To examine sensitivity, change one input at a time and record the source and period used for beta, the risk free rate, and the market return. A different beta or equity risk premium changes the result directly, so a single value should not be presented as certain.
Step by step
- Enter the annual risk free rate as a percentage.
- Enter a unitless beta and the annual expected market return as a percentage.
- Review the signed equity risk premium, beta contribution, and expected return.
Worked example
Enter a 4% risk free rate, a 10% expected market return, and beta of 1.2. The equity risk premium is 10% − 4% = 6 percentage points. The beta contribution is 1.2 × 6% = 7.2 percentage points. Expected return is 4% + 7.2% = 11.2%.
If beta is zero with the same rates, the beta contribution is zero and expected return is 4%. If beta is −0.5, the contribution is −3 percentage points and expected return is 1%. These results show how signed inputs affect the formula, not what an investment will earn.
When to use this calculator
Use the calculator to inspect a CAPM cost of equity assumption or to see how beta and the assumed market return affect that estimate. It is most useful when the inputs are documented and you want to compare scenarios consistently.
Use WACC Calculator when debt and equity both fund the business. Use Hamada Beta when adjusting beta for leverage, and keep the CAPM estimate separate from a realized portfolio return.
Common input mistakes
Enter rates as percentages such as 4 for 4%, not as decimals such as 0.04. Enter beta as a unitless number such as 1.2. Confirm that the market return and risk free rate refer to comparable periods and currencies.
Do not enter an equity risk premium in the market return field. The calculator subtracts the risk free rate from the expected market return to derive the premium.
CAPM formula
ERP = expected market return − risk free rate
Expected return = risk free rate + beta × ERP
Rates use annual percentage units and should match the currency and horizon being analyzed. Beta is a user supplied, unitless assumption. Negative beta and negative equity risk premiums are valid inputs. Results are unavailable if the inputs or calculated values exceed reliable numeric range.
Assumptions and limits
CAPM represents expected return using one market risk factor. This calculator does not estimate beta, select an appropriate premium, or include company specific risk, taxes, transaction costs, liquidity, or changing assumptions. Inputs should use comparable annual percentage units, currency, and horizon. The output is a transparent model estimate, not personalized financial advice or a guaranteed return.
Key terms
- Risk free rate
- A rate used as the model baseline, chosen to match the currency and approximate horizon of the analysis.
- Equity risk premium
- Expected market return minus the risk free rate, expressed here in percentage points.
- Beta
- A unitless measure of an asset's sensitivity to a chosen market benchmark, supplied by the user in this calculator.
Related analysis
Use WACC Calculator when combining equity and debt financing costs. Hamada Beta can adjust an observed beta for a different capital structure, while Jensen Alpha compares a realized return with a CAPM benchmark.
A CAPM result is only one part of valuation work. Compare it with other documented cost of equity methods and test how the discount rate affects a separate cash flow model.
FAQ
What does the CAPM expected return represent?
It is the risk free rate plus beta multiplied by the equity risk premium. It is a model estimate under the entered assumptions, not a forecast that a security will earn that return.
What is the equity risk premium in this calculator?
It is expected market return minus the risk free rate. For example, a 10% market return and a 4% risk free rate give a 6 percentage point equity risk premium.
Can I enter a negative beta or negative premium?
Yes. Signed finite inputs are allowed. A negative beta reverses the premium contribution. A negative equity risk premium means the entered market return is below the risk free rate, so check that both assumptions use comparable periods and units.
What happens when beta is zero?
The beta contribution is zero, so expected return equals the risk free rate. This follows directly from the formula and does not mean the investment has no risk.
Does this calculator estimate beta from historical prices?
No. Enter a beta from a source and period you choose. Different benchmarks, return intervals, and estimation windows can produce different beta values.
Related tools
Continue with WACC Calculator for a combined financing rate, Hamada Beta for a leverage adjustment, or Jensen Alpha to compare realized performance with a CAPM benchmark.