Enter the expected return from your investment, the expected return of the market, and risk-free return to determine the CAPM beta.
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CAPM Beta Formula
The following formula is used to calculate a CAPM beta.
B = (ERi - rf ) / (ERm - rf)
- Where B is the beta
- ERi is the expected return of the investment
- ERm is the expected return of the market
- rf is the risk-free return
To calculate a CAPM beta, subtract the expected market return from the expected investment return, then divide by the result of the market return minus the risk-free return.
CAPM Beta Definition
A CAPM beta is a coefficient used in the capital asset pricing model to describe the ratio of the return of an investment compared to the return of the market relative to a risk-free investment.
Can CAPM Beta be negative?
CAPM beta can be negative if the expected return of the investment or expected return of the market is less than the risk-free return. In reality, this almost never happens unless you have a poor investment, but it is entirely possible.
What does beta mean in CAPM?
Beta in CAPM is a measure of how good your investment is performing compared to the market, but relative to some risk-free asset. The higher the beta the better performing your asset is, or the worse performing the overall market is compared to your investment.
What is zero beta CAPM?
A zero beta CAPM is a model in which the return on investment is equal to that of a risk-free return. This results in a beta of zero.
Is CAPM beta levered or unlevered?
More often than not, CAPM beta is considered to be unlevered.
CAPM Beta Example
How to calculate CAPM beta?
- First, determine the return of your investment.
Estimate the expected return of your investment.
- Next, determine the return of the market.
Estimate the return of the market over the same time period.
- Next, determine the return of a risk free asset.
This is typically assets like bonds.
- Finally, calculate the beta.
Calculate the CAPM beta using the formula above.
FAQ
A CAPM beta is a ratio of the return on an investment to the return on the market relative to the return on some risk free asset.
