Estimate the return investors should demand for a stock given its risk. Enter the risk-free rate, beta and expected market return and the capital asset pricing model returns the required return — the same number companies use as their cost of equity.
Answer first: the capital asset pricing model says a stock's fair expected return equals the risk-free rate plus a premium for the extra risk it adds to a diversified portfolio. This CAPM calculator multiplies the market's excess return by the stock's beta and adds the risk-free rate to give the required return — the discount rate a shareholder should demand and the figure companies plug in as their cost of equity.
Required return = Rf + β × (Rm − Rf)
Example: a 4% risk-free rate, a beta of 1.2 and a 10% expected market return give 4 + 1.2 × (10 − 4) = 4 + 1.2 × 6 = 4 + 7.2 = 11.2%. The 6% gap between the market and cash is the equity risk premium; multiplied by the beta of 1.2 it becomes a 7.2% premium for this particular stock.
The logic is elegant. Cash-like Treasury bills pay the risk-free rate for taking essentially no risk. The whole stock market pays more — the equity risk premium — to compensate for its ups and downs. An individual stock earns that premium scaled by its beta, a measure of how much it amplifies market moves. A beta of 1.0 moves with the market; 1.5 swings 50% harder; 0.6 is defensive. CAPM only rewards this market-linked risk, because company-specific risk can be diversified away for free.
Beta is the engine of the model. A high-beta growth stock might carry a beta of 1.4, demanding a much higher return than a utility at 0.5. That is why speculative names need to promise more upside to be worth owning, and why defensive stocks can look "expensive" yet still be rational holdings — investors accept a lower expected return for a smoother ride. Negative-beta assets, which rise when the market falls, can even command a return below the risk-free rate as portfolio insurance.
CAPM's output is the cost of equity, one of the two ingredients in a company's weighted average cost of capital. Blend it with the after-tax cost of debt and you have the discount rate for a full DCF valuation. This is where an abstract academic model touches real prices: a rise in the risk-free rate lifts every required return, pushes discount rates up, and mechanically lowers the present value of future cash flows across the market — part of why higher interest rates tend to pressure stock prices.
CAPM is a simplification, and its critics are right that reality is messier. Beta is estimated from past data and drifts over time; the "market return" is a forecast, not a fact; and decades of research show low-beta stocks have historically beaten what the model predicts. Treat CAPM as a disciplined starting point for the cost of equity, then sanity-check it against dividend-based estimates and common sense rather than trusting one decimal.
Reality check: expected returns are estimates, not guarantees — any stock can lose money regardless of its beta. This calculator is educational, not investment advice. Learn the basics of risk and return from the U.S. SEC at investor.gov.
Feed this required return into the WACC calculator and the DCF calculator, measure the stock's risk with the beta calculator, and compare risk-adjusted performance with the Sharpe and Treynor ratio calculators.
Last updated July 4, 2026 · Written by Mustafa Bilgic. Educational only — not financial advice.
CAPM estimates the return an investor should require from a stock given its market risk. That required return doubles as the company's cost of equity, used in valuation and WACC.
It is the extra return investors expect from the overall stock market above the risk-free rate — the market return minus the risk-free rate. Historically it has averaged roughly 4%–6% in the U.S., though estimates vary.
Beta scales the equity risk premium. A beta above 1 raises the required return because the stock is more volatile than the market; a beta below 1 lowers it. A beta of exactly 1 gives the market return.
CAPM is a useful framework but a simplification. Beta is estimated from history and market returns are forecasts, so treat the output as a reasoned estimate and cross-check it with other methods.