Capital Market Line Calculator

✖Risk Free Return is the theoretical rate of return attributed to an investment with zero risk.ⓘ Risk Free Return [Rf]			+10% -10%
✖Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio.ⓘ Expected Return on Market Portfolio [ER_m]			+10% -10%
✖Market Risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.ⓘ Market Risk [σ_m]			+10% -10%
✖Portfolio Risk is a chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives.ⓘ Portfolio Risk [σ_p]			+10% -10%

✖The Expected Portfolio Return is the combination of the expected returns, or averages of probability distributions of possible returns, of all the assets in an investment portfolio.ⓘ Capital Market Line [R_p]

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Formula

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Capital Market Line

Formula

`"R"_{"p"} = "Rf"+(("ER"_{"m"}-"Rf")/"σ"_{"m"})*"σ"_{"p"}`

Example

`"9.6"="12"+(("9"-"12")/"5")*"4"`

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Capital Market Line Solution

STEP 0: Pre-Calculation Summary

Formula Used

Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk
R_p = Rf+((ER_m-Rf)/σ_m)*σ_p
This formula uses 5 Variables

Variables Used

Expected Portfolio Return - The Expected Portfolio Return is the combination of the expected returns, or averages of probability distributions of possible returns, of all the assets in an investment portfolio.
Risk Free Return - Risk Free Return is the theoretical rate of return attributed to an investment with zero risk.
Expected Return on Market Portfolio - Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio.
Market Risk - Market Risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.
Portfolio Risk - Portfolio Risk is a chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives.

STEP 1: Convert Input(s) to Base Unit

Risk Free Return: 12 --> No Conversion Required
Expected Return on Market Portfolio: 9 --> No Conversion Required
Market Risk: 5 --> No Conversion Required
Portfolio Risk: 4 --> No Conversion Required

STEP 2: Evaluate Formula

Substituting Input Values in Formula

R_p = Rf+((ER_m-Rf)/σ_m)*σ_p --> 12+((9-12)/5)*4

Evaluating ... ...

R_p = 9.6

STEP 3: Convert Result to Output's Unit

9.6 --> No Conversion Required

FINAL ANSWER

9.6 <-- Expected Portfolio Return

(Calculation completed in 00.020 seconds)

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Credits

Created by Keerthika Bathula

Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad

Keerthika Bathula has created this Calculator and 50+ more calculators!

Verified by Vishnu K

BMS College of Engineering (BMSCE), Bangalore

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< 3 Quantitative Finance Calculators

Ibbotson Chen Earnings Model

Go Equity Risk Premium = ((1+(Expected Inflation*0.01))*(1+(Expected Real Growth in EPS*0.01))*(1+(Expected Changes in PE Ratio*0.01))-1+(Expected Yield on Index*0.01)-(Expected Risk Free Rate*0.01))*100

Capital Market Line

Go Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk

Risk Neutral Probability

Go Risk Neutral Probability = (((1+(Risk Free Rate/100))*Initial Stock Price)-Stock Down Price)/(Stock Price Up-Stock Down Price)

Capital Market Line Formula

Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk
R_p = Rf+((ER_m-Rf)/σ_m)*σ_p

What Is a Capital Market Line (CML)?

The Capital Market Line (CML) is a special case of the CAL, that is, the line that makes up the allocation between a risk-free asset and a risky portfolio for an investor. In the case of the CML, the risk portfolio is the market portfolio. Where an investor has defined “the market” to be their domestic stock market index, the expected return of the market is expressed as the expected return of that index. The risk-return characteristics for the potential risk asset portfolios can be plotted to generate a Markowitz efficient frontier. The point at which the line from the risk-free asset touches or is tangential to the Markowitz portfolio is defined as the market portfolio. The line connecting the risk-free asset with the market portfolio is the CML.

How to Calculate Capital Market Line?

Capital Market Line calculator uses Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk to calculate the Expected Portfolio Return, The Capital Market Line is a special case of the CAL, that is, the line that makes up the allocation between a risk-free asset and a risky portfolio for an investor. Expected Portfolio Return is denoted by R_p symbol.

How to calculate Capital Market Line using this online calculator? To use this online calculator for Capital Market Line, enter Risk Free Return (Rf), Expected Return on Market Portfolio (ER_m), Market Risk (σ_m) & Portfolio Risk (σ_p) and hit the calculate button. Here is how the Capital Market Line calculation can be explained with given input values -> 9 = 12+((9-12)/market_risk)*4.

FAQ

What is Capital Market Line?

The Capital Market Line is a special case of the CAL, that is, the line that makes up the allocation between a risk-free asset and a risky portfolio for an investor and is represented as R_p = Rf+((ER_m-Rf)/σ_m)*σ_p or Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk. Risk Free Return is the theoretical rate of return attributed to an investment with zero risk, Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio, Market Risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets & Portfolio Risk is a chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives.

How to calculate Capital Market Line?

The Capital Market Line is a special case of the CAL, that is, the line that makes up the allocation between a risk-free asset and a risky portfolio for an investor is calculated using Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk. To calculate Capital Market Line, you need Risk Free Return (Rf), Expected Return on Market Portfolio (ER_m), Market Risk (σ_m) & Portfolio Risk (σ_p). With our tool, you need to enter the respective value for Risk Free Return, Expected Return on Market Portfolio, Market Risk & Portfolio Risk 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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