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CAPM Calculator

Expected Return
9.20%
✓ Reviewed by David Chen, CFA
Last Updated: November 2025

Is This Stock Worth the Risk?

CAPM (Capital Asset Pricing Model) tells you what return you should expect from a stock based on how risky it is. The logic is simple: if Treasury bonds pay 3% with zero risk, why would you buy a volatile tech stock unless it's expected to return way more than 3%?

The formula is: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Example: Treasury bonds = 4%, S&P 500 average = 10%, Stock Beta = 1.5
Expected Return = 4% + 1.5 × (10% - 4%) = 4% + 9% = 13%

Translation: This stock is 50% more volatile than the market. If it's not expected to return at least 13%, you're not being paid enough for the extra risk.

💡 Expert Insight
Beta Is Not a Crystal Ball
Beta only tells you past volatility. Tesla had Beta 2.0 in 2020 (super volatile), but that doesn't guarantee it'll stay that way. Use CAPM as a sanity check, not a fortune teller.
⚠️ Common Mistake
Forgetting Beta Can Be Negative
Gold stocks often have Beta -0.5 (they go up when the market crashes). A negative Beta means CAPM will give you an expected return below the risk-free rate. That's OK—gold is insurance, not a growth play.

Real-World Example: Tech vs Utility Stock

Scenario: Risk-Free Rate = 4%, Market Return = 10%
Stock A (Tech): Beta = 1.8
CAPM Expected Return = 4% + 1.8 × (10% - 4%) = 14.8%
High risk, high expected return. If this stock is only projected to return 9%, run away.
Stock B (Utility): Beta = 0.5
CAPM Expected Return = 4% + 0.5 × (10% - 4%) = 7%
Low risk, low expected return. Boring but stable. Good for retirees.

What You Need to Know

  • Risk-Free Rate: Use the 10-Year Treasury yield (around 4-5% in late 2024).
  • Market Return: Historically, S&P 500 averages 10% annually. Some use 8% to be conservative.
  • Beta: Find it on Yahoo Finance or Bloomberg. Beta 1.0 = market average volatility.
  • CAPM Limitations: It assumes markets are efficient and investors are rational. (Spoiler: they're not.)
🎯 David Chen's Take
"I don't live by CAPM, but I use it to spot red flags. If a stock's Beta is 2.5 but it's only expected to return S&P-level returns, that's a warning sign. Either the market's wrong, or you're about to eat a lot of risk for nothing."

Frequently Asked Questions

What is CAPM and how does it work?

CAPM (Capital Asset Pricing Model) calculates what return you should expect from a stock based on its risk. The formula is: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). If Treasury bonds pay 3% (risk-free) and the S&P 500 averages 10%, a stock with Beta 1.5 should return 13.5% to justify its extra risk.

What does Beta mean in CAPM?

Beta measures how volatile a stock is compared to the market. Beta = 1 means it moves with the market. Beta > 1 means it's more volatile (tech stocks often have Beta 1.5-2.0). Beta < 1 means it's less volatile (utilities might have Beta 0.6). Higher beta=higher risk=you should demand higher returns.

Is CAPM useful for real investing?

CAPM is a theoretical model used by portfolio managers and analysts to estimate fair value. It's not a guarantee, but it helps answer: "Am I being compensated enough for this risk?" If a high-beta stock (Beta 2.0) is only expected to return 8% when CAPM says it should return 15%, that's a red flag.

What's a good risk-free rate to use?

Use the current 10-Year U.S. Treasury yield as the risk-free rate. As of late 2024, that's around 4-5%. Don't use savings account rates (too low) or short-term T-bills (too volatile). The 10-Year is the standard benchmark for long-term investing.

References