CAPM - Beta Calculator

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Capital Asset Pricing Model - Beta

The Security Market Line (SML) depicts the risk-return relationship for an efficient portfolio of securities. The SML uses Beta as a risk measure, wheras the CML (Capital Market Line), uses the Standard Deviation (CAPM - SD) as its measure of risk. The SML may also be used with individual securities. The equation for the SML is the equation that is generally thought of as the Capital Asset Pricing Model.

price = RiskFree Return + (Beta * (Market Return - RiskFree Return))

For example, Michael has a diversified portfolio that yielded a 16% return over the last year. The risk free rate of return for this period is 7% and the beta for Michael's portfolio is 1.25 (or 25% more volatile than the market). Michael wants to know whether or not his portfolio performed well on a risk adjusted basis.

On a risk-adjusted basis, Michael's portfolio returned 13.25%, which exceeds the expected return (market return) of 12%.