FINANCE / REQUIRED RETURN
Estimate a required equity return from a risk-free rate, beta, and expected market return.
METHOD / WORKED EXAMPLE
CAPM provides a transparent required-return scenario tied to systematic market risk as represented by beta.
WORKED DEFAULT
At a 4% risk-free rate, beta of 1.2, and 10% expected market return, the market premium is 6%, the beta-scaled premium is 7.2%, and expected return is 11.2%.
READ THE RESULT
Beta above one amplifies the market premium in this model; beta below one reduces it. Beta does not capture every source of risk.
ASSUMPTIONS AND LIMITS
CAPM assumptions are uncertain and beta is backward-looking; the result is not a predicted investment return.
COMMON QUESTIONS
Choose a high-quality government rate aligned with the currency and horizon of the cash flows as closely as practical. A mismatch between short-term and long-term rates can distort the scenario.
Beta is the estimated sensitivity of an asset return to the selected market return. It represents systematic risk in CAPM and does not capture company-specific events, liquidity, model error, or every market regime.
No. It is a model result based on supplied assumptions. Actual returns can differ substantially, and different beta windows, risk-free rates, and market-premium assumptions can produce different required-return estimates.
RELATED TOOLS
Use boundary
The calculator subtracts the risk-free rate from the market return, multiplies that premium by beta, and adds the risk-free rate.
Expected return = risk-free rate + beta x (market return - risk-free rate).