CAPM โ Smart Financial Analysis
Calculate expected returns based on systematic risk. E(R) = Rf + ฮฒ(Rm - Rf). Tesla, Walmart, S&P 500 โ see the CAPM expected return for any stock.
Why This Matters for Your Finances
Why: The Capital Asset Pricing Model (CAPM) calculates expected return based on systematic risk: E(R) = Rf + ฮฒ(Rm - Rf). Developed by Sharpe (1964), Lintner (1965), Mossin (1966) โ S...
How: Enter Risk-Free Rate (%), Beta (ฮฒ), Expected Market Return (%) to get instant results. Try the preset examples to see how different scenarios affect the outcome, then adjust to match your situation.
- โThe Capital Asset Pricing Model (CAPM) calculates expected return based on systematic risk: E(R) = Rf + ฮฒ(Rm - Rf).
- โE(R) = Rf + ฮฒ(Rm - Rf).
- โBeta measures a stock's sensitivity to market movements.
- โThe risk-free rate (Rf) is typically the 10-year Treasury yield (~4.5%).
๐ Quick Examples โ Click to Load
๐ Security Market Line
Risk vs return โ expected return by beta
๐ CAPM by Stock
Tesla, Walmart, S&P 500, Growth, Utility
๐ Beta Spectrum
Beta and CAPM return by stock type
๐ฉ Expected Return Breakdown
Risk-free + market premium components
CAPM Expected Return
E(R) = 4.5% + 1.2 ร 5.50% = 11.10%. Market risk premium: 5.50%.
โ ๏ธFor educational purposes only โ not financial advice. Consult a qualified advisor before making decisions.
๐ก Money Facts
CAPM analysis is used by millions of people worldwide to make better financial decisions.
โ Industry Data
Financial literacy can increase household wealth by up to 25% over a lifetime.
โ NBER Research
The average American makes 35,000 financial decisions per yearโmany can be optimized with calculators.
โ Cornell University
Globally, only 33% of adults are financially literate, making tools like this essential.
โ S&P Global
The Capital Asset Pricing Model (CAPM) calculates the expected return based on systematic risk: E(R) = Rf + ฮฒ(Rm - Rf). Developed by Sharpe (1964), Lintner (1965), Mossin (1966) โ Sharpe won the Nobel Prize. Risk-free rate (Rf): typically 10yr Treasury yield (~4.5%). Market risk premium (Rm - Rf): historically ~5.5%. Beta measures the stock's sensitivity to market movements. The Security Market Line (SML) plots expected return vs beta โ stocks ABOVE the SML have positive alpha (outperformance). CAPM is the foundation of modern portfolio theory and is used in WACC calculations for corporate finance.
Sources: Sharpe (1964), CFA Institute, Damodaran NYU, Fama & French.
Key Takeaways
- โข E(R) = Rf + ฮฒ(Rm - Rf) โ expected return = risk-free + beta ร market risk premium
- โข Beta > 1 = more volatile than market; Beta < 1 = defensive
- โข Stocks above the Security Market Line have positive alpha (outperformance)
- โข CAPM underpins WACC and cost of equity in corporate finance
Did You Know?
- โข William Sharpe won the 1990 Nobel Prize for CAPM
- โข Tesla's beta ~2.0 โ CAPM expects ~15.5% return (Rf 4.5%, MRP 5.5%)
- โข Walmart's beta ~0.5 โ defensive, CAPM ~7.25%
- โข S&P 500 has beta 1.0 by definition โ CAPM return = market return
- โข Alpha = Actual Return - CAPM Expected Return (positive = outperformance)
How It Works
The Formula
E(R) = Rf + ฮฒ(Rm - Rf). Risk-free rate compensates for time value of money. Beta ร market risk premium compensates for systematic risk.
Security Market Line
The SML plots expected return vs beta. Slope = market risk premium. Stocks above the line are undervalued (positive alpha); below = overvalued.
Beta Interpretation
ฮฒ=1: moves with market. ฮฒ>1: amplifies market moves (growth stocks). ฮฒ<1: dampens (utilities, consumer staples).
Expert Tips
CAPM by Stock Type
| Stock | Beta | CAPM Return | Profile |
|---|---|---|---|
| Tesla | 2.0 | 15.5% | High growth |
| Walmart | 0.5 | 7.25% | Defensive |
| S&P 500 | 1.0 | 10.0% | Market |
| Utility | 0.3 | 6.15% | Very defensive |
Frequently Asked Questions
What is CAPM?
The Capital Asset Pricing Model (CAPM) calculates expected return based on systematic risk: E(R) = Rf + ฮฒ(Rm - Rf). Developed by Sharpe (1964), Lintner (1965), Mossin (1966) โ Sharpe won the Nobel Prize. CAPM is the foundation of modern portfolio theory and is used in WACC calculations for corporate finance.
What is the CAPM formula?
E(R) = Rf + ฮฒ(Rm - Rf). Rf = risk-free rate (e.g., 10yr Treasury ~4.5%). Rm = expected market return. ฮฒ = stock's beta (sensitivity to market). Example: Tesla ฮฒ=2.0, Rf=4.5%, Rm=10% โ CAPM = 4.5% + 2.0 ร (10% - 4.5%) = 15.5% expected return.
What is CAPM beta?
Beta measures a stock's sensitivity to market movements. ฮฒ=1 means the stock moves with the market. ฮฒ>1 (e.g., Tesla 2.0) = more volatile, higher expected return. ฮฒ<1 (e.g., Walmart 0.5) = defensive, lower expected return. ฮฒ=0.3 (utilities) = barely above risk-free.
What is the risk-free rate in CAPM?
The risk-free rate (Rf) is typically the 10-year Treasury yield (~4.5%). It compensates investors for the time value of money. It represents the return with zero risk. All expected returns in CAPM build on this baseline.
What is the market risk premium?
Market risk premium = Rm - Rf (expected market return minus risk-free rate). Historically ~5.5%. It's the extra return investors demand for taking on market risk. Higher beta stocks earn a larger share of this premium.
What are CAPM limitations?
CAPM assumes efficient markets, constant beta, and that only systematic risk matters. It ignores size, value, and momentum factors (addressed by Fama-French). Beta can be unstable. Real returns often deviate from CAPM predictions โ hence alpha (outperformance).
Key Formulas
E(R) = Rf + ฮฒ(Rm - Rf)
Expected return = risk-free rate + beta ร market risk premium.
Market Risk Premium = Rm - Rf
Extra return for taking market risk. Historically ~5.5%.
Alpha = Actual Return - CAPM Expected Return
Positive alpha = outperformance; negative = underperformance.
Sources
- โข Sharpe (1964) โ Capital asset prices: A theory of market equilibrium
- โข CFA Institute โ Cost of capital and CAPM
- โข Damodaran NYU โ Equity risk premiums and beta
- โข Fama & French โ Multi-factor models extending CAPM