This capital asset pricing model calculator (CAPM) can help the investor figure out the expected return on a capital asset at a given risk level. The CAPM is a common stock valuation tool used by investors. This calculator provides both the expected return on the capital asset as well as the stock market premium paid to investors.
The variables used in our online calculator are defined in detail below, including how to interpret the results.
A stock beta is used to mathematically describe the relationship between the movements of an individual stock versus the market itself. Investors can use a stock's beta to measure the risk of a security versus the market. For example, in June December 2017 the beta of 3M Company was 0.94, Google was 1.06, while Citigroup Inc. was 1.66.
The expected market return is the return the investor would expect to receive from a broad stock market indicator, such as the S&P 500. Over the last 90 years or so, the S&P 500 has yielded investors an average annual return of around 9.8%
The risk free interest rate is the interest rate the investor would expect to receive from a risk-free investment. Typically, U.S. Treasury Bills are used for U.S. dollars and German Government bills are used for the Euro.
The equity market premium is simply the difference between the expected stock market return and the risk-free interest rate. This is the premium paid to those investing in stocks, and is normally higher than the risk free rate. This premium compensates investors for taking on the additional risk associated with buying stocks.
This is the predicted return the investor can expect to receive, based on the capital asset pricing model, or CAPM. For this stock, risk is determined by the stock's beta. The CAPM formula calculates the appropriate return for the investor based on that risk.
Disclaimer: These online calculators are made available and meant to be used as a screening tool for the investor. The accuracy of these calculations is not guaranteed nor is its applicability to your individual circumstances. You should always obtain personal advice from qualified professionals.