1. What is the CAPM Model?

The CAPM (Capital Asset Pricing Model) is a financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

2. How Does the Calculator Work?

The calculator uses the CAPM formula:

Where:

• \( E(r) \) — Expected return on the capital asset (%)
• \( Rf \) — Risk-free rate (%)
• \( \beta \) — Beta of the security (unitless)
• \( Rm \) — Expected return of the market (%)

Explanation: The model calculates the expected return of an asset based on its beta, the risk-free rate, and the market risk premium.

3. Importance of CAPM Calculation

Details: CAPM is crucial for determining the required rate of return for risky assets, evaluating investment opportunities, and making informed portfolio management decisions.

4. Using the Calculator

Tips: Enter risk-free rate in %, beta value (unitless), and market return in %. All values must be valid numerical inputs.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical risk-free rate?
A: The risk-free rate is typically based on government bond yields, such as 10-year Treasury bonds for US investments.

Q2: How is beta calculated?
A: Beta is calculated by regressing the returns of the stock against the returns of the market over a specific period.

Q3: What does a beta of 1 mean?
A: A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means the security is less volatile than the market.

Q4: What are the limitations of CAPM?
A: CAPM assumes markets are efficient, investors are rational, and there are no transaction costs or taxes, which may not reflect real-world conditions.

Q5: Can CAPM be used for all types of investments?
A: While primarily used for stocks, CAPM can be applied to other investments, though its assumptions may be less appropriate for certain asset classes.