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 provides a theoretical estimate of the appropriate required rate of return for an asset given its risk relative to the market.

2. How Does the Calculator Work?

The calculator uses the CAPM formula:

Where:

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

Explanation: The formula calculates the expected return by adding the risk-free rate to the product of the investment's beta and the market risk premium.

3. Importance of CAPM Calculation

Details: CAPM is widely used in finance for determining the cost of equity, evaluating investment opportunities, and assessing whether a security is fairly valued given its risk level.

4. Using the Calculator

Tips: Enter risk-free rate in percentage, beta coefficient (unitless), and expected market return in percentage. All values must be valid non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good beta value?
A: Beta values below 1 indicate less volatility than the market, beta of 1 indicates market-level volatility, and beta above 1 indicates higher volatility 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 benchmark.

Q3: What time period should be used for market return?
A: Historical average market returns over a long period (10-20 years) are commonly used to estimate expected market returns.

Q4: Are there limitations to the CAPM model?
A: Yes, CAPM assumes efficient markets, rational investors, and that beta fully captures systematic risk, which may not always hold true in real markets.

Q5: Can CAPM be used for all types of investments?
A: CAPM is primarily designed for equity investments and may not be appropriate for other asset classes like bonds or real estate.