Enter the expected return from your investment, the expected return of the market, and risk free return to determine the CAPM beta.
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
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 how good your investment is performing compared to the market, but relative to some risk-free asset. The higher the beta the beta 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 an 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.
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.