1. What is CAPM?

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. It's widely used in finance to determine a theoretically appropriate required rate of return of an asset.

2. How Does the Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (measure of volatility)
• \( R_m \) — Expected market return (%)
• \( (R_m - R_f) \) — Market risk premium

Explanation: The model shows that the expected return equals the risk-free return plus a risk premium based on the asset's systematic risk.

3. Importance of CAPM Calculation

Details: CAPM is crucial for determining the cost of equity, evaluating investment opportunities, and making capital budgeting decisions. It helps investors understand the relationship between expected return and risk.

4. Using the Calculator

Tips: Enter the risk-free rate (typically government bond yield), the asset's beta (from financial data providers), and the expected market return (historical average or forecast). All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical risk-free rate?
A: Usually the yield on 10-year government bonds (e.g., US Treasury bonds) is used as the risk-free rate.

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

Q3: What market return should I use?
A: Historical average market returns (typically 7-10% for US markets) or analyst forecasts can be used.

Q4: What are CAPM's limitations?
A: CAPM assumes markets are efficient, investors are rational, and that beta fully captures risk - which may not always hold true.

Q5: Can CAPM be used for private companies?
A: Yes, but you'll need to estimate beta using comparable public companies or industry averages.