Loading...
Calculate expected return using the Capital Asset Pricing Model
CAPM is a financial model that calculates the expected return on an investment based on its systematic risk (beta), the risk-free rate, and the expected market return.
Treasury bill rate
S&P 500 avg: ~10%
Required return based on risk level
CAPM Formula
| Asset Type | Typical Beta | Description |
|---|---|---|
| Treasury Bonds | ~0 | Risk-free benchmark |
| Utilities | 0.3-0.6 | Defensive, stable |
| Consumer Staples | 0.6-0.9 | Low volatility |
| S&P 500 Index | 1.0 | Market benchmark |
| Technology | 1.2-1.5 | Growth-oriented |
| Small Cap Growth | 1.5-2.0 | High volatility |
Buy Signal
If actual expected return > CAPM expected return, the asset may be undervalued
Avoid Signal
If actual expected return < CAPM expected return, the asset may be overvalued
Fair Value
If actual return ≈ CAPM return, the asset is fairly priced for its risk
Formula
E(R) = Rf + β × (Rm − Rf)E(R) = expected return on the asset
Rf = risk-free rate (typically 3-month T-bill or 10-year Treasury yield)
β (beta) = sensitivity of the asset's return to market movements
(Rm − Rf) = market risk premium: extra return investors demand above risk-free rate
Worked Example
Rf = 4.5%, β = 1.2, Rm = 10%
Did you know? CAPM was developed independently by William Sharpe (1964), John Lintner (1965), and Jan Mossin (1966). Sharpe won the 1990 Nobel Prize in Economics partly for this contribution.
Sources
Generate a full amortization schedule showing each payment's principal and interest split.
Calculate auto loan payments with down payment, trade-in, and amortization schedule.
Calculate capital gains tax with short-term and long-term rates. Includes NIIT and residence exclusion.
Calculate cash flow from operations, investing, and financing to analyze business health.
Calculate CD interest earned and maturity value. Compare rates and terms.
Calculate compound interest with contributions, compounding frequency, and year-by-year growth breakdown.