A "Fair Rate of Return" is the minimum return an investor should expect for a specific investment, given its risk profile relative to the overall market. The most widely accepted method to calculate this is the Capital Asset Pricing Model (CAPM).
The CAPM Formula
The calculation uses three primary variables to determine the equilibrium return:
In this scenario, the Fair Rate of Return is 11.5%. If you expect the stock to return less than this, it is considered "overvalued" for the risk you are taking.
function calculateFRR() {
var rf = parseFloat(document.getElementById('riskFreeRate').value);
var beta = parseFloat(document.getElementById('investmentBeta').value);
var rm = parseFloat(document.getElementById('expectedMarketReturn').value);
var resultDiv = document.getElementById('frrResult');
var resultValue = document.getElementById('frrValue');
var interpretation = document.getElementById('frrInterpretation');
if (isNaN(rf) || isNaN(beta) || isNaN(rm)) {
alert("Please enter valid numeric values for all fields.");
return;
}
// CAPM Formula: Er = Rf + Beta * (Rm – Rf)
var marketRiskPremium = rm – rf;
var fairReturn = rf + (beta * marketRiskPremium);
resultValue.innerText = fairReturn.toFixed(2) + "%";
resultDiv.style.display = "block";
var message = "";
if (beta > 1) {
message = "With a Beta of " + beta + ", this asset is more volatile than the market. You require a higher return of " + fairReturn.toFixed(2) + "% to justify the additional risk.";
} else if (beta 0) {
message = "With a Beta of " + beta + ", this asset is less volatile than the market. A lower return of " + fairReturn.toFixed(2) + "% is considered fair for this stability.";
} else if (beta === 1) {
message = "Since the Beta is 1.0, the fair return matches the expected market return.";
} else {
message = "The calculated return accounts for the risk-free base and the specific asset volatility.";
}
interpretation.innerText = message;
// Smooth scroll to result
resultDiv.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}