The Capital Asset Pricing Model (CAPM) provides an expression which relates the expected return on an asset to its systematic risk. The relationship is known as the Security Market Line (SML) equation and the measure of systematic risk in the CAPM is called Beta.

The SML equation is expressed as follows:

E[R_i] = R_f + (E[R_m] - R_f ) * b_i

where

• E[R_i] = the expected return on asset i,
• R_f = the risk-free rate,
• E[R_m] = the expected return on the market portfolio,
• b_i = the Beta on asset i, and
• E[R_m] - R_f = the market risk premium.

Inputs and Results

• Expected Return on Stock i Field (%) - The Expected Return on Stock i is calculated or entered in this field.
• Risk Free Rate Field (%) - The Risk Free Rate (%) is calculated or entered in this field.
• Expected Return on the Market Field (%) - The Expected Return on the Market Portfolio is displayed or entered in this field.
• Beta for Stock i Field - The Beta for Stock i is displayed or entered in this field.
• Buttons - Press the buttons on the right-hand to calculate the corresponding value.
  • E[R_i] Button - Press to calculate the Expected Return on Asset i.
  • Rf Button - Press to calculate the Risk Free Rate.
  • E[R_m] Button - Press to calculate the Expected Return on the Market Portfolio.
  • Beta Button - Press to calculate the Beta for Asset i.