Capm Calculator

Capital Asset Pricing Model (CAPM) Calculator

function calculateCAPM() { var riskFreeRateInput = document.getElementById("riskFreeRate").value; var betaInput = document.getElementById("beta").value; var marketReturnInput = document.getElementById("marketReturn").value; var resultDiv = document.getElementById("capmResult"); // Validate inputs if (riskFreeRateInput === "" || betaInput === "" || marketReturnInput === "") { resultDiv.innerHTML = "Please enter all values."; return; } var riskFreeRate = parseFloat(riskFreeRateInput); var beta = parseFloat(betaInput); var marketReturn = parseFloat(marketReturnInput); if (isNaN(riskFreeRate) || isNaN(beta) || isNaN(marketReturn)) { resultDiv.innerHTML = "Please enter valid numbers for all fields."; return; } // Convert percentages to decimals var riskFreeRateDecimal = riskFreeRate / 100; var marketReturnDecimal = marketReturn / 100; // CAPM Formula: Expected Return = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate) var expectedReturnDecimal = riskFreeRateDecimal + beta * (marketReturnDecimal – riskFreeRateDecimal); // Convert back to percentage for display var expectedReturnPercentage = expectedReturnDecimal * 100; resultDiv.innerHTML = "" + expectedReturnPercentage.toFixed(2) + "%"; } .capm-calculator-container { font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif; background-color: #f9f9f9; border: 1px solid #ddd; border-radius: 8px; padding: 25px; max-width: 600px; margin: 30px auto; box-shadow: 0 4px 12px rgba(0, 0, 0, 0.08); color: #333; } .capm-calculator-container h2 { text-align: center; color: #2c3e50; margin-bottom: 25px; font-size: 1.8em; } .calculator-form .form-group { margin-bottom: 18px; display: flex; flex-direction: column; } .calculator-form label { margin-bottom: 8px; font-weight: bold; color: #555; font-size: 1em; } .calculator-form input[type="number"] { padding: 12px 15px; border: 1px solid #ccc; border-radius: 5px; font-size: 1.1em; width: 100%; box-sizing: border-box; transition: border-color 0.3s ease; } .calculator-form input[type="number"]:focus { border-color: #007bff; outline: none; box-shadow: 0 0 0 3px rgba(0, 123, 255, 0.25); } .calculate-button { background-color: #007bff; color: white; padding: 14px 25px; border: none; border-radius: 5px; font-size: 1.15em; cursor: pointer; display: block; width: 100%; margin-top: 25px; transition: background-color 0.3s ease, transform 0.2s ease; } .calculate-button:hover { background-color: #0056b3; transform: translateY(-2px); } .calculate-button:active { transform: translateY(0); } .result-container { background-color: #e9f7ef; border: 1px solid #d4edda; border-radius: 8px; padding: 18px; margin-top: 30px; text-align: center; font-size: 1.2em; color: #155724; } .result-container h3 { color: #28a745; margin-top: 0; margin-bottom: 10px; font-size: 1.4em; } .result-container p { margin: 0; font-weight: bold; color: #000; }

Understanding the Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a widely used financial model that helps investors determine the expected rate of return for an asset or investment. It provides a framework for understanding the relationship between systematic risk (market risk) and expected return, suggesting that investors should be compensated for both the time value of money and the risk they undertake.

What is CAPM?

At its core, CAPM calculates the theoretical expected return an investor should receive for taking on a certain level of risk. It posits that the expected return on an asset is equal to the risk-free rate plus a risk premium, which is determined by the asset's beta and the market risk premium.

The formula for CAPM is:

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

Components of the CAPM Formula:

• Risk-Free Rate (R_f): This represents the return on an investment with zero risk. Typically, the yield on a long-term government bond (like a U.S. Treasury bond) is used as a proxy for the risk-free rate. It compensates investors for the time value of money, meaning the opportunity cost of not having their money available for other uses.
• Asset Beta (β): Beta is a measure of an asset's systematic risk, or its volatility relative to the overall market. A beta of 1 indicates that the asset's price will move with the market. A beta greater than 1 suggests the asset is more volatile than the market, while a beta less than 1 means it's less volatile. For example, a beta of 1.5 means the asset is expected to move 1.5% for every 1% move in the market.
• Expected Market Return (R_m): This is the anticipated return of the overall market over a specified period. It's often estimated using historical market returns or by forecasting future market performance.
• Market Risk Premium (R_m – R_f): This is the difference between the expected market return and the risk-free rate. It represents the additional return investors expect for taking on the average risk of the market, above and beyond the risk-free rate.

How to Use the CAPM Calculator:

Our CAPM calculator simplifies the process of determining an asset's expected return. Simply input the following values:

1. Risk-Free Rate (%): Enter the current risk-free rate as a percentage (e.g., 2.5 for 2.5%).
2. Asset Beta: Input the beta coefficient for the specific asset you are analyzing.
3. Expected Market Return (%): Provide your estimate for the expected return of the overall market as a percentage (e.g., 8.0 for 8.0%).

Click "Calculate Expected Return," and the calculator will instantly display the expected return for your asset based on the CAPM model.

Example Calculation:

Let's say you are evaluating an investment with the following characteristics:

• Risk-Free Rate (R_f) = 3%
• Asset Beta (β) = 1.3
• Expected Market Return (R_m) = 9%

Using the CAPM formula:

Expected Return = 3% + 1.3 × (9% – 3%)

Expected Return = 0.03 + 1.3 × (0.06)

Expected Return = 0.03 + 0.078

Expected Return = 0.108 or 10.8%

This means, according to CAPM, an investor should expect a 10.8% return from this asset given its risk profile relative to the market.

Limitations of CAPM:

While CAPM is a foundational model in finance, it has several limitations:

• Assumptions: CAPM relies on several strong assumptions, such as efficient markets, rational investors, and the ability to borrow and lend at the risk-free rate, which may not hold true in the real world.
• Beta Volatility: Beta can be unstable and change over time, making its estimation challenging. Historical beta may not always be a reliable predictor of future beta.
• Market Portfolio: The "market portfolio" in CAPM is theoretical and includes all risky assets. In practice, a broad market index (like the S&P 500) is used as a proxy, which may not perfectly represent the true market.
• Single Factor Model: CAPM is a single-factor model, meaning it only considers systematic risk (beta). Other factors, such as company size, value, or specific industry risks, are not explicitly accounted for, leading to the development of multi-factor models.

Despite its limitations, CAPM remains a valuable tool for estimating the cost of equity, evaluating investment opportunities, and understanding the relationship between risk and return in financial markets.