“What should this investment earn?” has two different answers depending on what you hold. For a single stock, finance theory (CAPM) says expected return depends on its systematic risk — its beta. For a portfolio, expected return is simply each holding’s return weighted by its size.
This free expected return calculator does both: CAPM mode estimates a single asset’s required return from the risk-free rate, beta and market return, while portfolio mode blends up to four holdings into one expected portfolio return. Switch modes with one tap — results update instantly.
CAPM · portfolio weighted return
CAPM vs. portfolio return — which do I need? ⓘ
Please check your inputs — all values must be valid numbers.
Estimates only — expected return is a model input, not a prediction. CAPM won William Sharpe the 1990 Nobel Prize in Economics. Not investment advice.
How to Use This Calculator
- Choose a mode — CAPM for a single asset, Portfolio for blending up to 4 holdings.
- CAPM: enter the risk-free rate (e.g. 10-year Treasury), the asset’s beta, and the expected market return.
- Portfolio: enter each asset’s dollar value and its expected return %.
- Click Calculate Return for the expected return plus supporting stats (risk premiums, weights, step-by-step math).
Expected return formulas
where Rf = risk-free rate, β = beta, Rm = expected market return
Portfolio: E(Rp) = Σ (wi × ri)
where wi = weight of asset i, ri = its expected return
Worked examples
CAPM: Rf = 3%, β = 1.2, Rm = 8%.
E(R) = 3% + 1.2 × (8% − 3%) = 3% + 6% = 9%
Portfolio: $20k at 7.5%, $15k at 4%, $10k at 9%, $5k at 3.5% (total $50k).
E(Rp) = 0.40×7.5 + 0.30×4 + 0.20×9 + 0.10×3.5 = 6.35%
Putting expected return to work
- Cost of equity: CAPM output is the standard cost-of-equity input for WACC and DCF valuations.
- Asset allocation: portfolio mode shows how shifting weights — say, from bonds to equities — moves your expected return.
- Reality check: expected return is a long-run average, not a promise; actual returns swing widely around it year to year.
- Risk lens: a higher expected return always comes with higher volatility — compare the risk premium, not just the headline number.
The Scenario Method: Probability-Weighted Expected Return
Textbooks actually define expected return as a probability-weighted average: list what could happen, weight each outcome by its chance, and add them up. E(R) = p₁·r₁ + p₂·r₂ + … . Suppose three scenarios for next year: recession with a 20% chance of −5%, normal conditions with a 60% chance of 10%, and a boom with a 20% chance of 18%. Then E(R) = 0.20 × (−5%) + 0.60 × 10% + 0.20 × 18% = −1.0 + 6.0 + 3.6 = 8.6%. The weights must sum to 100%. This framing is what CAPM and the portfolio blend above are shortcuts for — when you cannot credibly assign probabilities, you fall back on betas and market averages.
Portfolio Beta: Running CAPM on a Whole Portfolio
A portfolio’s beta is just the weighted average of its holdings’ betas: βp = w₁·β₁ + w₂·β₂ + … . Take a portfolio split 50/50 between a β = 1.2 stock and a β = 0.8 stock: βp = 0.5 × 1.2 + 0.5 × 0.8 = 1.0. Feed that into CAPM with a 3% risk-free rate and 8% expected market return: E(R) = 3% + 1.0 × (8% − 3%) = 8.0%. This equals the weighted average of the two stocks’ individual CAPM returns — 9% and 7% averaged is 8% — so both of this calculator’s modes agree. The portfolio beta is also the number to carry into WACC calculations as the cost of equity for a diversified holder.
Frequently Asked Questions
What is a good expected return?
Versus history, US equities have delivered ~10% nominal (~7% real) long-run. A “good” expected return depends on risk taken: 4–5% for high-grade bonds, 7–10% for diversified equities. Anything promising far more deserves skepticism about the risk behind it.
When do I use CAPM vs. portfolio mode?
Use CAPM when evaluating a single stock or project — it answers what return the asset’s systematic risk demands. Use portfolio mode when you hold multiple assets and want the blended return of the whole allocation.
Where do I find a stock’s beta?
Yahoo Finance, Morningstar and most brokerages publish beta (usually 5-year monthly vs. the S&P 500). Note that beta drifts over time and differs by estimation window — treat it as approximate.
What is the market risk premium?
Rm − Rf: the extra return investors demand for holding equities over risk-free bonds. The calculator shows it — historically around 4–6% for the US market.
Can beta be negative?
Yes, though rare — gold and some hedge strategies can move against the market. Negative beta in CAPM yields an expected return below the risk-free rate, reflecting the asset’s insurance-like behavior.
Is expected return the same as actual return?
No. Expected return is the probability-weighted long-run average; any single year can land far above or below it. Never mistake the model’s center for a guarantee.
How do you calculate expected return using probabilities?
Multiply each scenario’s return by its probability and add the results: E(R) = p₁·r₁ + p₂·r₂ + … . With a 20% chance of −5%, a 60% chance of 10% and a 20% chance of 18%, the expected return is 0.20×(−5) + 0.60×10 + 0.20×18 = 8.6%. The probabilities must total 100%.
What are the limitations of CAPM?
Four honest ones. It is a single-factor model — size, value and momentum effects are ignored. Beta is estimated from history and drifts over time. The market-return input is itself a guess. And it assumes frictionless markets, so taxes, trading costs and investor psychology are outside its world. Use CAPM as a disciplined estimate, never as a promise.
Final Thoughts
Every figure on this page was computed live by the tool above — try your own numbers and see how the math responds.
Estimate returns the way professionals do — try both modes above, then explore our other free investment calculators.