What is Capital Asset Pricing Model (CAPM)?
Capital Asset Pricing Model (CAPM) Calculator: The Capital Asset Pricing Model (CAPM) is a financial model that calculates the expected return on an asset or investment based on its risk relative to the overall market. The CAPM formula is used to determine whether an investment is worth the risk compared to other potential investments or the risk-free rate.
Calculate Capital Asset Pricing Model
| Risk Premium of the Asset % | Expected Rate of Return (R) |
|---|---|
Calculation Method
FAQs
1. What is the purpose of the CAPM?
The Capital Asset Pricing Model (CAPM) helps investors estimate the expected return on an asset based on its risk compared to the market. It aids in determining whether an investment offers a good return given its risk level.
2. What is Beta in the CAPM formula?
Beta (β) measures the sensitivity of an asset's returns to the overall market's returns. A Beta of 1 means the asset's price moves in line with the market, while a Beta higher than 1 means the asset is more volatile than the market.
3. How is the risk-free rate (Rf) determined?
The risk-free rate (Rf) is usually based on the return of a government bond with no risk of default, such as a 10-year U.S. Treasury bond. It represents the return an investor would expect from an absolutely safe investment.
4. What is a good expected rate of return?
A good expected rate of return depends on the risk level of the investment. Higher returns are typically expected from riskier investments, while safer assets like bonds may offer lower returns. Investors aim for a return that exceeds the risk-free rate.
5. Can CAPM be used for any asset?
Yes, the CAPM can be used to calculate the expected return for any asset, including stocks, bonds, or other investments, as long as you have the necessary inputs like Beta, market return, and the risk-free rate.