Calculating your expected return (capm) is straightforward once you know the CAPM formula and what each input means. This guide explains the method in plain language, walks through a manual calculation, and gives worked examples you can follow — then you can do it instantly with the CAPM Calculator.
What is CAPM?
The CAPM calculation tells you your expected return (capm) from a few simple inputs. The figure you are solving for here is the expected return (capm), expressed in percent.
The CAPM formula
The core formula is:
Expected return (CAPM) = Risk-free rate + Beta × (Expected market return - Risk-free rate)Here is what each input means:
- Risk-free rate — a percentage, such as an annual rate. Example: 7%.
- Beta — a number. Example: 1.2.
- Expected market return — a percentage, such as an annual rate. Example: 12%.
How to calculate it step by step
- Write down the risk-free rate (for example, 7%).
- Write down the beta (for example, 1.2).
- Write down the expected market return (for example, 12%).
- Apply the formula above to get your expected return (capm).
- Double-check the result with the CAPM Calculator.
Worked examples
Example 1
| Input / Output | Value |
|---|---|
| Risk-free rate | 7% |
| Beta | 1.2 |
| Expected market return | 12% |
| Expected return (CAPM) | 13.000% |
| Equity risk premium | 6.000% |
With risk-free rate of 7%, beta of 1.2 and expected market return of 12%, the expected return (capm) works out to 13.000%.
Example 2
With risk-free rate of 14%, beta of 1.2 and expected market return of 12%, the expected return (capm) works out to 11.600%.
| Result | Value |
|---|---|
| Expected return (CAPM) | 11.600% |
| Equity risk premium | -2.400% |
Example 3
With risk-free rate of 3.5%, beta of 1.2 and expected market return of 12%, the expected return (capm) works out to 13.700%.
| Result | Value |
|---|---|
| Expected return (CAPM) | 13.700% |
| Equity risk premium | 10.200% |
Tips for an accurate result
- Keep your units consistent — mixing, say, months with years or grams with kilograms is the most common source of error.
- Round only at the very end. Rounding inputs early can shift the final answer noticeably.
- Re-run the numbers whenever an input changes, rather than estimating from an old result.
- Annual rates must be converted to the period you are calculating for (for example, divide an annual rate by 12 for a monthly figure).
Prefer not to do the maths by hand? — the CAPM Calculator does it instantly, for free, with the formula and a worked example built in.
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