CAPM Expected Return

Risk & Portfolio
Updated Apr 2026 • Has calculator

Estimates a stock's required return based on its beta and the expected market risk premium.

What is CAPM?

The Capital Asset Pricing Model (CAPM) provides a formula for the return an investor should require from a risky investment, given its systematic risk. The model states that the expected return equals the risk-free rate plus a risk premium scaled by beta. If the actual expected return of a stock is higher than the CAPM estimate, it may be undervalued; if lower, overvalued. CAPM underpins the Security Market Line (SML) and is widely used for cost-of-equity calculations in discounted cash flow (DCF) models, corporate hurdle rates, and portfolio attribution. Despite its simplifying assumptions — single-period horizon, frictionless markets, investors holding only the market portfolio — CAPM remains the most commonly used risk-return framework in practice.

Formula

E(R) = Rf + β × (Rm − Rf)

Worked Example

Worked example — Apple Inc. (AAPL)

FY2024 Cost-of-Equity Estimate

Step 1  Risk-free rate (10-yr Treasury): 4.30%
Step 2  Apple's beta (5-year monthly): 1.24
Step 3  Expected market return (S&P 500 long-run): 10.50%
Step 4  E(R) = 4.30% + 1.24 × (10.50% − 4.30%) = 4.30% + 1.24 × 6.20%
Step 5  E(R) = 4.30% + 7.69% = 11.99% ≈ 12.0% required return

Source: Damodaran Online — Cost of Capital by Sector (US) (2024-01-01)

Calculate CAPM

10-year US Treasury yield (e.g. 4.30)

Stock's systematic risk relative to the market

Long-run S&P 500 expected return (~10–11% historically)

CAPM Expected Return

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Not investment advice.

How to Interpret CAPM

< 5
Below 5% — near risk-free; implies very low beta
5 – 10
5–10% — below market rate; defensive stock
10 – 15
10–15% — near market rate; typical equity hurdle rate
> 15
Above 15% — high-beta stock; requires high expected return
Sources
  1. CFA Institute — Portfolio Management, 7th ed., Ch. 5
  2. Damodaran Online — Cost of Capital
  3. Investopedia — CAPM