1. What is the CAPM Required Return?

The Capital Asset Pricing Model (CAPM) calculates the required return on an investment based on its systematic risk (beta), the risk-free rate, and the expected market return. It helps investors determine the appropriate return they should expect for the level of risk taken.

2. How Does the Calculator Work?

The calculator uses the CAPM formula:

Where:

• \( R_f \) — Risk-free rate (%)
• \( \beta \) — Beta coefficient (measure of systematic risk)
• \( R_m \) — Expected market return (%)
• \( R_m - R_f \) — Market risk premium

Explanation: The formula calculates the minimum return an investor should accept given the investment's risk profile compared to a risk-free asset.

3. Importance of Required Return Calculation

Details: Calculating required return is essential for investment decision-making, portfolio management, capital budgeting, and security valuation. It helps determine if an investment offers adequate compensation for its risk level.

4. Using the Calculator

Tips: Enter risk-free rate as a percentage (e.g., 2.5 for 2.5%), beta coefficient (typically between 0.5-2.0), and expected market return as a percentage. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good risk-free rate?
A: Typically, government bond yields (like 10-year Treasury notes) are used as risk-free rates. The specific rate depends on current market conditions and the investment time horizon.

Q2: How is beta coefficient determined?
A: Beta is calculated by regressing the security's returns against market returns. A beta of 1 indicates the security moves with the market, while betas above/below 1 indicate higher/lower volatility.

Q3: What market return should I use?
A: Use historical average market returns (typically 7-10% for broad market indices) or forward-looking estimates based on current market conditions and economic forecasts.

Q4: Are there limitations to CAPM?
A: Yes, CAPM assumes efficient markets, rational investors, and that beta fully captures risk. It may not account for other risk factors like size, value, or momentum.

Q5: How is required return used in practice?
A: It's used as a discount rate in valuation models, for performance evaluation, in capital budgeting decisions, and to determine appropriate asset allocation in portfolios.