1. What is the CAPM Formula?

The CAPM (Capital Asset Pricing Model) formula calculates the expected return on an investment based on its systematic risk. It's a fundamental concept in modern financial theory that describes the relationship between risk and expected return.

2. How Does the Calculator Work?

The calculator uses the CAPM formula:

Where:

• \( E(r) \) — Expected return on the investment (%)
• \( Rf \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (measure of systematic risk)
• \( Rm \) — Expected market return (%)

Explanation: The formula calculates the appropriate required rate of return of an asset by quantifying its risk relative to the overall market.

3. Importance of CAPM Calculation

Details: CAPM is widely used in finance for valuing risky securities, generating expected returns for assets given their risk, and calculating the cost of capital for companies.

4. Using the Calculator

Tips: Enter the risk-free rate (typically government bond yield), beta coefficient (measure of stock volatility), and expected market return. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good beta value?
A: Beta of 1 indicates volatility equal to the market. Less than 1 means less volatile, greater than 1 means more volatile than the market.

Q2: How do I determine the risk-free rate?
A: Typically, the yield on government bonds (like 10-year Treasury notes) is used as the risk-free rate.

Q3: What are the limitations of CAPM?
A: CAPM assumes markets are efficient, investors are rational, and that beta is the only measure of risk, which may not reflect real-world conditions.

Q4: How often should inputs be updated?
A: Market conditions change frequently, so inputs should be updated regularly, especially when making investment decisions.

Q5: Can CAPM be used for all types of investments?
A: CAPM works best for publicly traded stocks. It may be less appropriate for private companies, real estate, or other alternative investments.