Typically the yield on a 10-Year US Treasury Bond.
A measure of the stock's volatility (1.0 = Market Average).
Historical average return of the S&P 500 (usually 8-10%).
Expected Stock Return (Cost of Equity):0.00%
Market Risk Premium:0.00%
Stock's Risk Premium:0.00%
How to Calculate Risk-Free Rate of a Stock
In the world of finance, the term "Risk-Free Rate" typically refers to the theoretical return of an investment with zero risk of financial loss. While stocks themselves are inherently risky assets and do not have a "risk-free rate," investors use the risk-free rate as a baseline to determine if a stock is worth purchasing. This is done using the Capital Asset Pricing Model (CAPM).
This calculator helps you determine the Expected Return (or Cost of Equity) of a specific stock by combining the current risk-free rate, the overall market return, and the stock's specific volatility (Beta).
1. What is the Risk-Free Rate?
The risk-free rate is the minimum return an investor expects for any investment because they would not accept additional risk unless the potential return is higher than the risk-free rate. In practice, the yield on the 10-Year U.S. Treasury Note is standardly used as the proxy for the risk-free rate because the U.S. government is considered extremely unlikely to default.
2. The CAPM Formula
To "calculate the risk-free rate of a stock" implies calculating the return required to justify the risk of holding that stock over a risk-free bond. The formula used is:
In this example, you should only invest in this stock if you expect it to return at least 13% annually. Anything less would not compensate you adequately for the risk compared to a safe government bond.
4. Real vs. Nominal Risk-Free Rate
The standard calculation uses the nominal rate (the number you see on the bond coupon). However, if you want to calculate the real risk-free rate (adjusted for purchasing power), you subtract the inflation rate:
Real Risk-Free Rate = Nominal Rate – Inflation Rate
Understanding these metrics is vital for corporate finance valuation, discounted cash flow (DCF) analysis, and portfolio management.
function calculateCAPM() {
// Get input values
var rfInput = document.getElementById('rfRate').value;
var betaInput = document.getElementById('stockBeta').value;
var rmInput = document.getElementById('marketReturn').value;
// Clean and parse values
var rf = parseFloat(rfInput);
var beta = parseFloat(betaInput);
var rm = parseFloat(rmInput);
// Validation
if (isNaN(rf) || isNaN(beta) || isNaN(rm)) {
alert("Please enter valid numbers for all fields.");
return;
}
// 1. Calculate Market Risk Premium (Rm – Rf)
var marketRiskPremium = rm – rf;
// 2. Calculate Stock's Risk Premium (Beta * (Rm – Rf))
var stockRiskPremium = beta * marketRiskPremium;
// 3. Calculate Expected Return (Rf + Stock Premium)
var expectedReturn = rf + stockRiskPremium;
// Display Results
document.getElementById('results').style.display = 'block';
// Update text content with 2 decimal places
document.getElementById('expectedReturn').innerHTML = expectedReturn.toFixed(2) + "%";
document.getElementById('riskPremium').innerHTML = marketRiskPremium.toFixed(2) + "%";
document.getElementById('stockPremium').innerHTML = stockRiskPremium.toFixed(2) + "%";
}