For each investment, the expected return Capital Asset Pricing Model (CAPM) is calculated using the established Capital Asset Pricing Model formula.
Expected Return = Rf + Beta * ERP
Where:
- Rf: The market risk-free rate. For example, the Australia 10-Year Bond Yield for Australian-listed securities, and the 10-Year Treasury Yield for US-listed securities.
- Beta: The equity’s Beta, which measures the portfolio’s volatility compared with the entire market.
- ERP: The expected market risk premium, representing the premium expected for investing in the market portfolio over the risk-free rate. ERP for each market is based on Professor Aswath Damodaran’s calculations and is updated twice a year.
Example for ASX:BHP as at 16/01/2025:
Rf = 4.51% (Australian Bond 10 Year Yield)
BetaBHP = 1.2 (benchmark: ASX All Ords Index)
ERPAustralia = 4.33%
Expected Return BHP = 4.51% + 1.209 * 4.33%
Expected Return BHP = 9.745%
Example — Using CAPM to calculate Portfolio Expected Return (values valid as at 20/1/2025)
Consider a hypothetical portfolio consisting of the following stocks:
- US:DUOL: 34% Portfolio weight
- ASX:ANZ 33% Portfolio weight
- US:JPM 33% Portfolio weight
| Company | Rf | BetaCompany | ERP | Expected Return (CAPM) |
| US:DUOL | 4.66% | 1.525 | 4.33% | 11.263% |
| ASX:ANZ | 4.51% | 0.887 | 4.33% | 8.351% |
| US:JPM | 4.66% | 0.855 | 4.33% | 8.362% |
Note: All values as at 20/1/2025
CAPM Formula: Expected Return = Rf + Beta * ERP
To Calculate the Portfolio Expected Return, find the weighted average of each stock and add together:
(Holding 1 Weight % * Expected Return CAPM) + (Holding 2 Weight % * Expected Return CAPM) + (Holding 3 Weight % * Expected Return CAPM)
Weighted Average of US:DUOL: 34% * 11.263% = 3.829%
Weighted Average of ASX:ANZ 33% * 8.351% = 2.756%
Weighted Average of US:JPM 33% * 8.362% = 2.759%
The sum of the weighted averages 3.829% + 2.756% + 2.759% is:
Portfolio Expected Return (CAPM) 9.345%
Summary
The CAPM model provides a framework for estimating expected returns based on systematic risk, but it may not fully capture all relevant factors, particularly for high-growth or more volatile securities. To view the Portfolio Expected Return (Historical) for this portfolio example, click here.
The divergence between historical and CAPM returns for this portfolio highlights the importance of considering multiple factors when assessing investment opportunities.
Note:
- Currently, the individual expected return calculated using the CAPM formula above does not incorporate adjustments for company size or exposure to other markets. These adjustments are planned for future updates.(Coming soon)
- When calculating using the CAPM formula, the expected return changes as the Rf, Beta, and the ERP change. Diversiview updates securities’ Beta values weekly, the Rf rate monthly, and the ERP twice a year.
To learn how to select your preferred calculation method for expected return in Diversiview, click here.