Required Rate of Return on Stock Calculator

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Required Rate of Return (CAPM) Calculator

Typically the yield on 10-year government bonds (e.g., US Treasury).
Volatility relative to the market. 1.0 = same as market; >1.0 = more volatile.
The average annual return expected from the overall stock market.

Required Rate of Return (RRR)

0.00%

What is the Required Rate of Return?

The Required Rate of Return (RRR) is the minimum percentage of profit an investor expects to receive for providing capital to a specific stock. It is a critical threshold used by analysts to determine if an investment is worth the risk. If the expected return of a stock is lower than the RRR, the investment is generally considered unattractive.

The CAPM Formula

This calculator utilizes the Capital Asset Pricing Model (CAPM), which is the most widely accepted method for calculating RRR. The formula is:

RRR = Risk-Free Rate + Beta × (Market Return – Risk-Free Rate)

Understanding the Components

  • Risk-Free Rate: The return on an investment with zero risk, such as government bonds. It compensates for inflation and time value of money.
  • Beta (β): A measure of how much the stock moves compared to the market. A beta of 1.5 means the stock is 50% more volatile than the market.
  • Equity Risk Premium: The "Market Return minus Risk-Free Rate" part of the formula. This represents the extra return demanded for taking on the volatility of the stock market.

Practical Example

Suppose you are looking at a tech company with a Beta of 1.25. If the 10-year Treasury yield (Risk-free rate) is 4% and the historical market return is 10%, your calculation would be:

RRR = 4% + 1.25 × (10% – 4%)
RRR = 4% + 1.25 × (6%)
RRR = 4% + 7.5% = 11.5%

In this case, you should only invest in the stock if you believe it will return at least 11.5% annually.

function calculateRRR() { var rf = parseFloat(document.getElementById('riskFreeRate').value); var beta = parseFloat(document.getElementById('stockBeta').value); var rm = parseFloat(document.getElementById('marketReturn').value); var resultDiv = document.getElementById('rrr-result-area'); var resultValue = document.getElementById('rrr-value'); var interpretation = document.getElementById('rrr-interpretation'); if (isNaN(rf) || isNaN(beta) || isNaN(rm)) { alert("Please enter valid numerical values for all fields."); return; } // CAPM Formula: RRR = Rf + Beta * (Rm – Rf) var rrr = rf + (beta * (rm – rf)); resultValue.innerText = rrr.toFixed(2) + "%"; resultDiv.style.display = 'block'; var interpText = ""; if (beta > 1) { interpText = "This stock is more volatile than the market, requiring a higher return premium."; } else if (beta 0) { interpText = "This stock is less volatile than the market, resulting in a lower required return."; } else { interpText = "The required return is based on market-neutral risk."; } interpretation.innerText = interpText; resultDiv.scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }

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