## Capital Asset Pricing Model Solution

STEP 0: Pre-Calculation Summary
Formula Used
Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate)
ERi = Rf+βi*(ERm-Rf)
This formula uses 4 Variables
Variables Used
Expected Return on Investment - Expected Return on Investment is a metric used to assess the potential profitability of an investment.
Risk Free Rate - The Risk Free Rate is the theoretical rate of return of an investment with zero risks.
Beta on Investment - Beta on Investment measures the sensitivity of an investment's returns to changes in the overall market returns.
Expected Return on Market Portfolio - Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio.
STEP 1: Convert Input(s) to Base Unit
Risk Free Rate: 0.015 --> No Conversion Required
Beta on Investment: 20 --> No Conversion Required
Expected Return on Market Portfolio: 8 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
ERi = Rfi*(ERm-Rf) --> 0.015+20*(8-0.015)
Evaluating ... ...
ERi = 159.715
STEP 3: Convert Result to Output's Unit
159.715 --> No Conversion Required
159.715 <-- Expected Return on Investment
(Calculation completed in 00.004 seconds)
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## Credits

Created by Vishnu K
BMS College of Engineering (BMSCE), Bangalore
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Verified by Nayana Phulphagar
Institute of Chartered and Financial Analysts of India National college (ICFAI National College), HUBLI
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## <Capital Budgeting Calculators

Cost of Retained Earnings
​ Go Cost of Retained Earnings = (Dividend/Current Stock Price)+Growth Rate
After-Tax Cost of Debt
​ Go After Tax Cost of Debt = (Risk Free Rate+Credit Spread)*(1-Tax Rate)
Payback Period
​ Go Payback Period = Initial Investment/Cashflow per Period
Cost of Debt
​ Go Cost of Debt = Interest Expense*(1-Tax Rate)

## Capital Asset Pricing Model Formula

Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate)
ERi = Rf+βi*(ERm-Rf)

## Capital Asset Pricing Model key components

Key components of the CAPM:

Risk Free rate: It is the theoretical return on an investment with zero risk. Typically, the yield on government bonds, such as U.S. Treasury bonds, is used as a proxy for the risk-free rate.

Market Risk Premium ​: This represents the excess return that investors expect to receive for taking on the additional risk of investing in the overall market instead of a risk-free asset. It reflects the compensation investors require for bearing systematic risk.

Beta: Beta measures the sensitivity of an investment's returns to changes in the overall market returns. A beta of 1 implies the investment moves in line with the market, while a beta greater than 1 suggests higher volatility, and a beta less than 1 implies lower volatility than the market.

The CAPM has its criticisms, including assumptions like a linear relationship between risk and return, the sole use of beta to measure risk, and the assumption that markets.

## How to Calculate Capital Asset Pricing Model?

Capital Asset Pricing Model calculator uses Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate) to calculate the Expected Return on Investment, The Capital Asset Pricing Model formula is defined as a financial model that establishes a linear relationship between the expected return of an investment and its systematic risk. It is widely used in finance to estimate the expected return on an investment, taking into account its risk as measured by beta. Expected Return on Investment is denoted by ERi symbol.

How to calculate Capital Asset Pricing Model using this online calculator? To use this online calculator for Capital Asset Pricing Model, enter Risk Free Rate (Rf), Beta on Investment i) & Expected Return on Market Portfolio (ERm) and hit the calculate button. Here is how the Capital Asset Pricing Model calculation can be explained with given input values -> 159.715 = 0.015+20*(8-0.015).

### FAQ

What is Capital Asset Pricing Model?
The Capital Asset Pricing Model formula is defined as a financial model that establishes a linear relationship between the expected return of an investment and its systematic risk. It is widely used in finance to estimate the expected return on an investment, taking into account its risk as measured by beta and is represented as ERi = Rfi*(ERm-Rf) or Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate). The Risk Free Rate is the theoretical rate of return of an investment with zero risks, Beta on Investment measures the sensitivity of an investment's returns to changes in the overall market returns & Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio.
How to calculate Capital Asset Pricing Model?
The Capital Asset Pricing Model formula is defined as a financial model that establishes a linear relationship between the expected return of an investment and its systematic risk. It is widely used in finance to estimate the expected return on an investment, taking into account its risk as measured by beta is calculated using Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate). To calculate Capital Asset Pricing Model, you need Risk Free Rate (Rf), Beta on Investment i) & Expected Return on Market Portfolio (ERm). With our tool, you need to enter the respective value for Risk Free Rate, Beta on Investment & Expected Return on Market Portfolio and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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