CAPM Formula Template

This CAPM formula template will help you calculate the required rate of return for investing in a security given the risk-free return and risk premium.

The Capital Asset Pricing Model (CAPM) describes the relationship between expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security.

The formula for calculating CAPM is as follow:

Expected return on a security = Risk-free rate + Beta of the security * (Expected return on market – Risk-free rate)

It is based on the premise that investors have assumptions of systematic risk (also known as market risk or non-diversifiable risk) and need to be compensated for it in the form of a risk premium – an amount of market return greater than the risk-free rate. By investing in a security, investors want a higher return for taking on additional risk.

Credits to :  Corporate Finance Institute