The Capital Asset Pricing Model estimates the return a stock should offer, given how much market risk it carries and what a safe alternative already pays.
How it works
It starts from a risk-free baseline — usually a government bond yield — then adds a premium sized to the stock’s beta: how much more (or less) it swings than the market as a whole. A beta of 1 tracks the market exactly; above 1 amplifies its moves, below 1 dampens them, and a negative beta moves against it.
Why beta and not the company’s own story
CAPM assumes company-specific risk — a bad earnings quarter, a lawsuit, a product recall — has already been diversified away by holding many stocks, so only the risk that moves with the whole market is left to be paid for. That is a simplifying assumption, not a guarantee; it is the model’s most common criticism.
How to use this calculator
- Enter the risk-free rate, usually a current 10-year government bond yield.
- Enter the stock’s beta, available from most brokerage or financial data pages.
- Enter the return you expect from the market as a whole.
Frequently asked questions
Where do I find a stock’s beta?
Most brokerage platforms and financial data sites publish it directly, usually calculated against a broad market index over the trailing few years.
What counts as “the market return”?
Commonly a long-run historical average for a broad index like the S&P 500, though reasonable people use different windows and it directly changes the answer.
Does a higher CAPM return mean a better stock?
No — it means the model expects more return only because it expects more risk. CAPM is a baseline for what a stock’s risk should be worth, not a buy signal on its own.
Why is my broker’s expected return different from this calculator’s?
Different risk-free rate, beta window, or market-return assumption — all three inputs are judgment calls, and small differences compound into a visibly different answer.
