CAPM Calculator
Work out the return an investor should require from a stock, using the Capital Asset Pricing Model with Pakistan defaults.
Use this result
Use 19.50% as the cost of equity in the WACC calculator →
Use 19.50% as the required return in the dividend discount model →
Sensitivity: required return by beta and risk premium
| Beta | ERP 5% | ERP 6% | ERP 7% | ERP 8% | ERP 9% |
|---|---|---|---|---|---|
| 0.5 | 15.00% | 15.50% | 16.00% | 16.50% | 17.00% |
| 0.75 | 16.25% | 17.00% | 17.75% | 18.50% | 19.25% |
| 1 | 17.50% | 18.50% | 19.50% | 20.50% | 21.50% |
| 1.25 | 18.75% | 20.00% | 21.25% | 22.50% | 23.75% |
| 1.5 | 20.00% | 21.50% | 23.00% | 24.50% | 26.00% |
How This Is Calculated
Required return = Risk-free rate + Beta × Equity risk premium
Worked example: with a 12.5% risk-free rate (10-year PIB), a beta of 1.2 and a 7% equity risk premium, the required return is 12.5% + 1.2 × 7% = 20.9%. A stock with a lower beta, say 0.8, would need only 12.5% + 0.8 × 7% = 18.1%.
The required return is what a company's shareholders expect for bearing its risk. It is the discount rate for the dividend discount model, the cost of equity inside WACC, and the hurdle that a stock's expected return must beat.
Defaults are pre-filled from the 10-year PIB yield as of September 2026 and an assumed equity risk premium; change both to match your assignment or your own view.
Frequently Asked Questions
What is the CAPM?
The Capital Asset Pricing Model says the return investors should require from a stock equals the risk-free rate plus the stock's beta times the equity risk premium. Higher beta (more sensitivity to the market) means a higher required return.
What risk-free rate should I use for Pakistan?
Most practitioners use the yield on the 10-year Pakistan Investment Bond (PIB), because it matches the long horizon of equity cash flows. The default here is the September 2026 10-year PIB cut-off yield (12.5%). Shorter horizons sometimes use the 6-month T-bill yield instead. Always enter the current figure from the State Bank of Pakistan.
What equity risk premium should I use?
The equity risk premium is the extra return investors expect from the stock market over the risk-free rate. There is no official figure; the default of 7% is an assumption within the 6-9% range often used for Pakistan. Course instructors may give you a specific number, so use theirs for assignments.
Where do I find a stock's beta?
Beta measures how much a stock moves relative to the market (usually the KSE-100). Brokerage research reports, Investing.com, Bloomberg and Reuters publish betas for PSX stocks. We do not calculate beta yet, so enter the figure from the source you trust. A beta of 1 means the stock moves with the market; above 1 is more volatile, below 1 is less.
What is Jensen's alpha?
If you enter the return you expect from the stock, alpha is that expected return minus the CAPM required return. A positive alpha means the stock is expected to earn more than its risk justifies; a negative alpha means less.
This tool is for educational purposes only and does not constitute investment advice. CAPM is a simplified model and the result depends entirely on the inputs you choose. See also: WACC Calculator · Dividend Discount Model · Fair Value Calculator · All Tools.