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CAPM Calculator

CAPM Calculator

To Calculate:

Expected rate of return (R)

%

Risk-free interest rate (Rf)

%

Broad market return (Rm)

%

Beta of stock (βi)

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An online CAPM calculator will allow you to calculate the expected rate of return based upon the respective market return and risk level for those assets. Also, the expected rate of return calculator can determine the beta of a stock, risk-free interest rate, and board market return which displays market risk premium, equity market premium of the asset by using the CAPM formula.

Let’s read on to understand the capital asset pricing model and how to find risk free rate in the CAPM model.

What is Capital Asset Pricing Model?

In finance, the capital asset pricing model (CAPM) refers to the relationship between expected return, beta in stock, and risk of investing in a security. It helps the investors to compute the expected return on the asset at a given risk level.

However, you can manually figure out this by using the CAPM formula. To make it convenient risk-free rate calculator will do the calculations for you.

CAPM Formula:

The CAMP equation relates to the expected return on market base and risk on stock:

Expected Return = Risk free rate + (Market premium * beta)

So we can calculate CAMP by using this expected return formula

$$R = Rf + [ (Rm – Rf) * Bi]$$

Where:

Risk Premium is \((Rm – Rf)\),

R = Expected return, Rf = Risk free rate, Bi = Beta of stock, Rm = Board market return.

However, an online Percentage Calculator is a tool that allows you to calculate percentages and also work out the percent values.

CAPM Example:

What is the expected return using the CAPM formula?

Solution:

We can calculate expected return by using CAPM equation,

$$R = Rf + [ (Rm – Rf) * Bi]$$

$$ = 5 + [ (9-5) * 4]$$

$$= 5 + [4 * 4]$$

So,

Expected rate of return = 21%

CAPM Model Graph:

The graph illustrates the CAMP model and the relationship between return and risk market:

CAPM Model Calculator

Expected Rate of Return:

The expected rate of return is a long-term presupposition about how the financing will play out over its whole life. It is donated by ‘R’ in the expected rate of return formula.

Risk-Free Rate:

The risk-free rate is an investment that earns no risk, but in real life, it consists of the risk of inflation. The risk-free rate also corresponds to the country where the investment is made, and the maturity period should also match the time horizon of the investment. Here’s a risk-free rate formula to compute risk-free interest rate:

$$Risk-Free Rate (Rf) = ((Bi * Rm) – R) / (Bi – 1)$$

CAPM Beta:

The beta is calculations of a stock risk reflected by measuring the fluctuation of price variations related to the whole market. We can calculate the beta of stock with the CAPM beta formula:

$$Beta (Bi) = (R – Rf) / (Rm – Rf)$$

Market Risk Premium:

The market risk premium is an excess return which is the difference between the Broad market return and the risk-free rate. It is represented by (Rm – Rf) in the CAPM equation that illustrates the expected return and risk-free rate. For instance, broad market return is 3% and risk-free rate 2% then equity market premium is 1 percent.

Moreover, an online Ratio Calculator allows you to determine the identical ratios by giving three out of four parts of two ratios.

How CAPM Calculator Works?

The capital asset pricing model calculator will measure CAPM with the following steps:

Input:

  • In order to find either expected rate, beta, risk-free rate, or board market return select an option from the drop-down menu.
  • Now, enter the corresponding values against the selected option of the drop-down list.
  • Hit the calculate button.

Output:

The expected rate of return calculator will display the following results:

  • The calculator shows the rate of return for each option.
  • Also, it gives risk, equity market, and expected rate of return based on market risk premiums with complete calculations.

FAQs:

What is the Risk Premium of the Asset?

It is the relationship between beta of the stock and Market Risk Premium which is calculated by

$$Risk Premium of Assets = Bi * (Rm – Rf)$$

What is Asset Pricing in Financial Economics?

It explores the factors that calculate the price of and returns on assets, including bonds, stocks, real estate, and currencies. Also, studies about the behavior of firms and households that put money in these assets.

How CAPM use to Determine the Cost of Equity?

In capital budgeting, professionals and corporate accountants commonly use the CAPM capital asset pricing model to approximate the cost of shareholders’ or investors’ equity.

Last Note:

Use an online CAPM calculator which helps the financial analysts to calculate the expected rate of return (R), beta of stock (Bi), risk-free interest rate (Rf), and board market return (Rm). Although you can manually figure out this with the CAPM formula it’s a very complex and time-consuming task. To make it convenient for you, a risk-free rate calculator will do numerous calculations for you instantly with 100% accurate results.

Reference:

From the source of Wikipedia: Inventors, Formula, Security market line, Asset pricing, Asset-specific required return.

From the source of Investopedia: Capital Asset Pricing Model (CAPM), Understanding the Capital Asset Pricing Model, Problems With the CAPM, The CAPM and the Efficient Frontier, Practical Value of the CAPM

From the source of Harvard Business Review: Capital Asset Pricing Model Working, Portfolio diversification, Two types of risk, The security market line.