1. What is the CAPM Required Return?

The Capital Asset Pricing Model (CAPM) calculates the expected return an investor should require for a particular investment, given its risk relative to the market. It considers the risk-free rate, the investment's beta (sensitivity to market movements), and the market risk premium.

2. How Does the Calculator Work?

The calculator uses the CAPM equation:

Where:

• \( \text{Risk Free} \) — Risk-free rate of return (decimal)
• \( \beta \) — Beta coefficient of the investment (unitless)
• \( \text{Market Premium} \) — Expected market return minus risk-free rate (decimal)

Explanation: The equation shows that an investment's required return equals the risk-free rate plus a risk premium based on the investment's systematic risk (beta).

3. Importance of Required Return

Details: Required return is crucial for investment decisions, portfolio management, and corporate finance decisions like capital budgeting. It helps determine whether an investment offers adequate compensation for its risk.

4. Using the Calculator

Tips: Enter all values in decimal form (e.g., 0.05 for 5%). Beta should reflect the investment's historical sensitivity to market movements. Market premium is typically between 4-8% (0.04-0.08) for most markets.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical risk-free rate?
A: Usually the yield on 10-year government bonds, typically 2-5% (0.02-0.05) in developed markets.

Q2: How is beta determined?
A: Beta is calculated through regression analysis of the investment's returns against market returns, usually using 3-5 years of monthly data.

Q3: What affects market premium?
A: Economic conditions, investor risk appetite, and expected future growth. Historical averages are often used as estimates.

Q4: Are there limitations to CAPM?
A: Yes, it assumes perfect markets and that beta fully captures risk. Other models like Fama-French may be more comprehensive.

Q5: How often should inputs be updated?
A: Risk-free rate and beta should be updated regularly (quarterly), while market premium estimates might be updated annually.