Calculate the required rate of return for a stock based on its risk profile relative to the market.
Typically the yield on 10-Year Treasury Bonds.
Volatility measure (1.0 = Market Average).
Average return of the S&P 500 or benchmark.
To calculate potential monetary gain.
Expected Rate of Return (CAPM)0.00%
Market Risk Premium0.00%
Stock Risk Premium0.00%
Projected 1-Year Value$0.00
function calculateStockReturn() {
// 1. Get input values
var rfInput = document.getElementById("rfRate").value;
var betaInput = document.getElementById("betaValue").value;
var rmInput = document.getElementById("marketReturn").value;
var investInput = document.getElementById("investmentAmount").value;
// 2. Validate numeric inputs
if (rfInput === "" || betaInput === "" || rmInput === "") {
alert("Please fill in Risk-Free Rate, Beta, and Expected Market Return.");
return;
}
var rf = parseFloat(rfInput);
var beta = parseFloat(betaInput);
var rm = parseFloat(rmInput);
var investment = parseFloat(investInput);
if (isNaN(rf) || isNaN(beta) || isNaN(rm)) {
alert("Please enter valid numbers.");
return;
}
// 3. CAPM Logic: E(Ri) = Rf + Beta * (Rm – Rf)
var marketRiskPremium = rm – rf;
var stockRiskPremium = beta * marketRiskPremium;
var expectedReturn = rf + stockRiskPremium;
// 4. Update Result Display
document.getElementById("results-area").style.display = "block";
document.getElementById("finalRate").innerHTML = expectedReturn.toFixed(2) + "%";
document.getElementById("marketPremium").innerHTML = marketRiskPremium.toFixed(2) + "%";
document.getElementById("stockPremium").innerHTML = stockRiskPremium.toFixed(2) + "%";
// 5. Handle Monetary Calculation (if provided)
if (!isNaN(investment) && investment > 0) {
var totalValue = investment * (1 + (expectedReturn / 100));
document.getElementById("monetary-row").style.display = "flex";
document.getElementById("projectedValue").innerHTML = "$" + totalValue.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
} else {
document.getElementById("monetary-row").style.display = "none";
}
}
Understanding the Expected Rate of Return on Stocks
The Expected Rate of Return is a key financial metric used by investors to determine the profit they can anticipate receiving from an investment portfolio or a specific stock. In corporate finance and equity valuation, this is most commonly calculated using the Capital Asset Pricing Model (CAPM).
This calculator utilizes the CAPM formula to determine if a stock is fairly valued given its risk level compared to the broader market. It helps investors answer the question: "Is the potential reward worth the risk?"
The Formula
The standard formula for calculating the expected return of a security is:
E(Ri) = Rf + βi (E(Rm) – Rf)
Where:
Rf (Risk-Free Rate): The theoretical return of an investment with zero risk. In practice, this is typically the yield on current 10-Year U.S. Treasury Bonds.
βi (Beta): A measure of a stock's volatility in relation to the overall market. A beta of 1.0 means the stock moves in sync with the market. A beta of 1.5 implies the stock is 50% more volatile.
E(Rm) (Expected Market Return): The average return of the market benchmark (like the S&P 500) over a long period. Historically, this is often estimated between 8% and 10%.
(E(Rm) – Rf): This represents the Market Risk Premium—the excess return investors demand for choosing stocks over risk-free bonds.
How to Interpret the Results
Once you input your variables, the calculator provides the Required Rate of Return. This is the minimum percentage return an investor should accept for holding a stock with that specific risk profile.
Example Scenarios:
Stock Type
Beta
Risk Interpretation
Expected Return (Approx)
Utility Company
0.5
Low Volatility
Lower (e.g., 6-7%)
Blue Chip Stock
1.0
Market Average
Average (e.g., 9-10%)
Tech Startup
2.0
High Volatility
Higher (e.g., 15%+)
Why is Beta Important?
Beta is the multiplier in the equation. If you are analyzing a high-growth technology stock with a beta of 1.5, the CAPM formula suggests that you should demand a higher return than the market average to compensate for the extra volatility. Conversely, a defensive stock with a beta of 0.6 requires a lower expected return because it adds stability to a portfolio.
Limitations
While the Expected Rate of Return calculator is a powerful tool for valuation, it relies on historical data (Beta) and estimates (Market Return). Actual stock returns are unpredictable in the short term and can be influenced by macroeconomic factors, company earnings, and market sentiment.