CAPM Calculator

Calculate expected return using the Capital Asset Pricing Model (CAPM): E(R) = Rf + β × (Rm − Rf). Includes country risk premium, Jensen's alpha, compare 3 stocks, and cost of equity for DCF valuation.

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Expected Return E(R)
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Equity Risk Premium (ERP) —
Stock Risk Premium (β × ERP) —
Interpretation —
Extended More scenarios, charts & detailed breakdown ▾
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Total Expected Return
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Base CAPM Return —
Country Risk Adjustment (λ × CRP) —
Professional Full parameters & maximum detail ▾
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CAPM Return

CAPM Expected Return —
Equity Risk Premium —

Alpha Analysis

Jensen's Alpha —
Alpha Interpretation —

Cost of Capital Comparison

After-Tax Cost of Debt —
Equity vs Debt Premium —

How to Use This Calculator

  1. Enter the Risk-Free Rate (use current 10-year Treasury ~4.5% in 2026).
  2. Enter the Expected Market Return (~10% for long-run US equities).
  3. Enter the stock's Beta (find on Yahoo Finance, Bloomberg, or calculate with our Beta Calculator).
  4. The calculator returns expected return, ERP, and risk premium component.
  5. Use With Country Risk Premium for international stocks.
  6. Open Professional for Jensen's alpha and cost of equity comparison.

Formula

E(R) = Rf + β × (Rm − Rf)

With CRP: E(R) = Rf + β(Rm−Rf) + λ × CRP

Example

Example: Rf = 4.5%, Rm = 10%, β = 1.2. ERP = 10 − 4.5 = 5.5%. E(R) = 4.5 + 1.2 × 5.5 = 11.1%. If the stock is actually expected to return 13.5%, Jensen's alpha = 13.5 − 11.1 = +2.4%.

Frequently Asked Questions

  • CAPM: E(R) = Rf + β × (Rm − Rf). Where Rf is the risk-free rate (Treasury yield), β is the stock's beta, and (Rm − Rf) is the equity risk premium. For example: Rf = 4.5%, β = 1.2, Rm = 10% → E(R) = 4.5 + 1.2 × 5.5 = 11.1%.
  • The ERP is the excess return investors demand for holding equities over risk-free assets: ERP = Rm − Rf. The long-run US historical ERP is approximately 5–6%. As of 2026, with 10-year Treasuries near 4.5% and expected market returns ~10%, the implied ERP is about 5.5%.
  • Jensen's alpha = Actual Return − CAPM Expected Return. A positive alpha means the stock or portfolio outperformed its risk-adjusted benchmark. Professional investors seek positive alpha as evidence of skill or mispricing.
  • For companies operating in emerging markets, an additional CRP is added: E(R) = Rf + β(Rm−Rf) + λ × CRP. Lambda (λ) is the fraction of revenues from the risky country. Damodaran publishes CRPs for 150+ countries annually.
  • Yes — CAPM remains the standard model for estimating cost of equity in DCF valuations, despite academic criticism. The Fama-French three-factor model adds size and value factors, but CAPM is the baseline taught in CFA curriculum and used in investment banking.

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Sources & References (5) ▾
  1. Capital Asset Prices: A Theory of Market Equilibrium — Sharpe (1964) — Journal of Finance
  2. Damodaran — Equity Risk Premiums (ERP): Determinants, Estimation and Implications — NYU Stern
  3. CFA Institute — Return Concepts and CAPM — CFA Institute
  4. CAPM Explained — Investopedia — Investopedia
  5. The Cross-Section of Expected Stock Returns — Fama & French (1992) — Journal of Finance