What is the market risk premium?

The expected market return minus the risk-free rate, the extra return investors demand for holding the market instead of a risk-free asset.

What risk-free rate should I use?

The yield on a government bond in the same currency, typically the 10-year yield for long-term valuations.

Can beta be negative?

Yes, for assets that tend to rise when the market falls. CAPM then gives a required return below the risk-free rate.

CAPM Formula and Calculator

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CAPM Calculator (Expected Return)

The capital asset pricing model gives the return investors should require from an asset given its exposure to market risk. It starts from the risk-free rate, the return on a government bond, and adds a risk premium equal to the asset’s beta multiplied by the market risk premium (the expected market return minus the risk-free rate).

Formula

E(R_i) = R_f + β_i × (E(R_m) − R_f)

Where

E(R_i): expected (required) return on the asset
R_f: risk-free rate, usually a government bond yield
β_i: beta: sensitivity of the asset to market movements
E(R_m): expected market return
E(R_m) − R_f: market risk premium

Calculator

Risk-free rate (Rf) (%)

Beta (β)

Expected market return (Rm) (%)

Result and step-by-step solution

Expected return

11.2%

Risk premium for this asset: 1.2 × 6% = 7.2% on top of the 4% risk-free rate.

Market risk premium
R_m − R_f = 10% − 4% = 6%
Scale by beta
1.2 × 6% = 7.2%
Add the risk-free rate
E(R) = 4% + 7.2% = 11.2%

How to use the formula

Beta measures how strongly the asset moves with the market. A beta of 1 means it tends to move in line with the market and should earn the market return; above 1 it is more volatile and requires more; below 1 it requires less. Only this market-wide, undiversifiable risk is rewarded in CAPM, because company-specific risk can be diversified away.

With a risk-free rate of 4%, a beta of 1.2 and an expected market return of 10%, the market risk premium is 6%, the asset’s risk premium 7.2%, and its required return 11.2%. The CAPM result is the usual cost of equity in the WACC formula and the discount rate in the Gordon growth model. Estimate beta from return data with the beta calculator.

Frequently asked questions

What is the CAPM formula?: E(R_i) = R_f + β_i × (E(R_m) − R_f).
What is the market risk premium?: The expected market return minus the risk-free rate, the extra return investors demand for holding the market instead of a risk-free asset.
What risk-free rate should I use?: The yield on a government bond in the same currency, typically the 10-year yield for long-term valuations.
Can beta be negative?: Yes, for assets that tend to rise when the market falls. CAPM then gives a required return below the risk-free rate.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.