1. What is the CAPM Required Return?

The Capital Asset Pricing Model (CAPM) calculates the expected return on an investment based on its systematic risk (beta), the risk-free rate, and the expected market return. It helps investors determine the appropriate required rate of return for an asset given its risk profile.

2. How Does the Calculator Work?

The calculator uses the CAPM formula:

Where:

• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (unitless)
• \( R_m \) — Expected market return (%)

Explanation: The formula calculates the minimum return an investor should expect for taking on additional risk beyond the risk-free rate.

3. Importance of CAPM Calculation

Details: CAPM is widely used in finance for portfolio management, capital budgeting, and security valuation. It helps determine whether an investment offers a reasonable expected return for its level of risk.

4. Using the Calculator

Tips: Enter the risk-free rate (typically government bond yields), the asset's beta coefficient, and the expected market return. All values must be non-negative percentages except beta which is unitless.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good risk-free rate?
A: Typically, government bond yields (like 10-year Treasury notes) are used as they represent virtually risk-free investments.

Q2: How is beta coefficient determined?
A: Beta is calculated by comparing the asset's historical returns to market returns. A beta of 1 means the asset moves with the market.

Q3: What are typical market return expectations?
A: Historical market returns average around 7-10% annually, but this varies by market conditions and time period.

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

Q5: How is CAPM used in investment decisions?
A: If an asset's expected return is higher than its CAPM required return, it may be undervalued and worth investing in.