Required Rate of Return Calculator
Calculate RRR using the Capital Asset Pricing Model (CAPM)
Typically the 10-year Treasury yield.
Stock's volatility vs market (1.0 is market average).
Historical average of S&P 500 or similar index.
Market Risk Premium:
0.00%
Equity Risk Premium (β adjusted):
0.00%
Required Rate of Return:
0.00%
How to Calculate Required Rate of Return in Excel
The Required Rate of Return (RRR) is the minimum return an investor accepts for owning a company's stock as compensation for a given level of risk associated with holding that stock. The most common method for calculating this is the Capital Asset Pricing Model (CAPM).
The CAPM Formula:
RRR = Risk Free Rate + Beta × (Market Return – Risk Free Rate)
RRR = Risk Free Rate + Beta × (Market Return – Risk Free Rate)
Step-by-Step Excel Calculation
To perform this calculation in Excel, you need three key inputs. Set up your spreadsheet as follows:
| Cell | Description | Example Value |
|---|---|---|
| A1 | Label: Risk-Free Rate | 3.5% |
| A2 | Label: Beta | 1.25 |
| A3 | Label: Expected Market Return | 10.0% |
| A4 | Label: Required Rate of Return | Formula Below |
The Excel Formula
In cell B4 (next to your "Required Rate of Return" label), enter the following formula:
=B1 + B2 * (B3 – B1)
Understanding the Inputs
- Risk-Free Rate (Rf): This is usually the yield on a 10-year US Treasury bond. It represents the return of an investment with zero risk.
- Beta (β): A measure of a stock's volatility in relation to the overall market. A beta greater than 1.0 means the stock is more volatile than the market; less than 1.0 means it is less volatile.
- Market Return (Rm): The expected return of the market index (like the S&P 500). Historically, this often ranges between 8% and 12%.
- Market Risk Premium (Rm – Rf): This is the difference between the expected market return and the risk-free rate. It represents the extra return investors demand for taking on the risk of the stock market.
Example Calculation
If the Risk-Free Rate is 3%, the Beta is 1.5, and the Expected Market Return is 11%, the math works like this:
- Calculate Risk Premium: 11% – 3% = 8%
- Adjust for Beta: 1.5 × 8% = 12%
- Add Risk-Free Rate: 3% + 12% = 15%
In this scenario, an investor would require a 15% return to justify the risk of buying this specific stock.