Enter the expected mark return rate, risk free rate, and Beta for the stock to calculate the return on a capital asset.

## CAPM Formula

The following formula is used by the CAPM to calculate the expected return of an asset or security.

E(R_{i}) = R_{f} + [ E(R_{m}) − R_{f} ] × β_{i}

- E(R
_{i}) is the expected return on the capital asset (%) - R
_{f}is the risk-free rate (%) - E(R
_{m}) is the expected return of the market (%) - β
_{i}is the beta of the security

The beta of the security is another way of saying the risk measure of the security. This will depend on the security, but this averages around a value of 4.

CAPM is a model that is a slight variation on the discounted cash flows model. In short, the only difference is that instead of using a margin of safety like in the discounted cash flows model, this uses a discounted rate dependent on beta.

## How to calculate expected return using CAPM

The following example is a step by step guide to determining the expected return of a security use the CAPM.

- The first step is to determine what variables we need to know in order to calculate the expected return. Looking at the formula above, you can see that the risk free rate (%), expected return of the market (%), and the beta must be determined.
- Now, we must determine the risk free rate of a return on capital. This is often consider things like savings accounts and security bonds. For this example we will assume a return of 3%.
- Next, the expected return rate of the market must be determined. This is the return rate of the security in the stock market. We will say 10%.
- Next, the beta of the security must be determined. This is a measure of risk. The higher the beta the higher the risk. We will assume a value of 4 for this example.
- Finally, enter all of the information into the calculator or formula. We find the expected rate of return is 31%.

This is a very large return, and the reason it’s so large is mostly because of the beta we chose of 4. The higher the beta the higher the return, but also the higher the risk.

## Related Terms

capm calculator |

capital asset pricing model calculator |

how to calculate capm |

capm formula |

capm equation |

capm model formula |

capital asset pricing model formula |

beta formula capm |

how to calculate beta in capm |

capm formula excel |

expected market return formula |

capm formula example |

formula del capm |

beta of portfolio formula |

expected return formula beta |

how to calculate asset beta |

formula de capm |

capm alpha formula |

beta asset formula |

how to calculate capm in excel |

capm formula explained |

how to calculate market return for capm |

capm equation does not consider |

required rate of return calculator beta |

calculate asset beta |

capm expected return formula |

risk free rate formula with beta |

beta in capm formula |

expected return calculator beta |

capm calculation example |

expected rate of return on market portfolio |

how to calculate capm beta in excel |

capital asset pricing model equation |

calculate beta capm |

how to find capm |

formula do capm |

how to calculate rm in capm |

how to calculate expected market return in capm model |

capm formula calculator |

calculate expected market return |

capm finance formula |

how to calculate risk free rate with beta and expected return |

how to calculate market return in capm |

how to calculate expected return of market |

required rate of return formula capm |

calculate capm in excel |

how to find market return for capm |

market risk premium formula with beta |

how to find beta in capm |

how to find expected return on market |

how to calculate portfolio weights with beta and expected return |

expected return on market portfolio formula |

how to calculate expected return on market |

formula for beta in capm |

capm calculator excel |

calculate cost of equity using dividend growth model |

capm model equation |

formula of beta in capm |

how to calculate expected return with beta |

risk free asset formula |

formula capm excel |

how is beta calculated in capm |

how to calculate capital asset pricing model |

calculate risk free rate with beta and expected return |

capm how to calculate beta |

how to find market risk premium with beta |

how to estimate beta in capm |

risk premium formula with beta |

return on market portfolio formula |

how to find rm in capm |

risk free rate formula capm |

how to calculate market expected return |

how to calculate expected return on the market |

beta calculation in capm |

how to calculate risk premium with beta |

capm excel formula |

how to calculate market risk premium with beta |

capm formula market risk premium |

capital asset formula |

how to calculate expected return using capm |

how to find risk free rate using capm |

metodo capm formula |

how to calculate risk free rate of return in excel |

how to determine beta in capm |

capm expected return calculator |

beta for portfolio formula |

capm model calculator |

beta systematic risk formula |

capm beta excel |

equation of capm |

how to calculate beta in capm model |

how to calculate beta using capm |

capm formula finance |

find risk free rate with beta and expected return |