{"id":1156,"date":"2025-01-17T02:38:54","date_gmt":"2025-01-17T02:38:54","guid":{"rendered":"https:\/\/diversiview.online\/help\/?p=1156"},"modified":"2025-10-06T06:11:29","modified_gmt":"2025-10-06T06:11:29","slug":"how-is-capm-calculated","status":"publish","type":"post","link":"https:\/\/diversiview.online\/help\/how-is-capm-calculated\/","title":{"rendered":"How Is CAPM Calculated?"},"content":{"rendered":"\n<p>For each investment, the expected return Capital Asset Pricing Model (CAPM) is calculated using the established <a href=\"https:\/\/corporatefinanceinstitute.com\/resources\/valuation\/what-is-capm-formula\/\">Capital Asset Pricing Model formula<\/a>.<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>Expected Return = Rf + Beta * ERP<\/strong><\/p>\n\n\n\n<p>Where:<\/p>\n\n\n\n<ul>\n<li><strong>Rf:<\/strong> The risk-free rate of return in the market considered, that is, what you would get if you invest in an instrument on that market that is theoretically safe and has not chances of default. For example, the <a href=\"https:\/\/www.bloomberg.com\/markets\/rates-bonds\/government-bonds\/australia\">Australia 10-Year Bond Yield<\/a> for Australian-listed securities.<\/li>\n\n\n\n<li><strong>Beta:<\/strong> The equity&#8217;s <a href=\"https:\/\/diversiview.online\/help\/portfolio-beta\/\">Beta<\/a>, which measures the portfolio\u2019s volatility compared with the entire market.<\/li>\n\n\n\n<li><strong>ERP:<\/strong> The Equity Risk Premium, representing the extra return that you should expect to receive for investing in risky assets in that particular market, on top of the risk-free rate. In Diversiview, the ERP for each market is based on <a href=\"https:\/\/pages.stern.nyu.edu\/~adamodar\/New_Home_Page\/datafile\/ctryprem.html\">Professor Aswath Damodaran&#8217;s calculations<\/a> and is updated twice a year.<\/li>\n<\/ul>\n\n\n\n<p><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:25px\"><strong><strong><strong><strong>Example<strong> Expected Return<\/strong><\/strong><\/strong><\/strong><\/strong> (CAPM) <strong><strong><strong><strong>for an individual security (ASX:BHP<\/strong><\/strong><\/strong><\/strong>):<\/h2>\n\n\n\n<p><strong>Rf <\/strong>= 4.51% (Australian Bond 10 Year Yield) as at 16\/01\/2025<\/p>\n\n\n\n<p><strong>Beta<sub>BHP<\/sub><\/strong><sub> <\/sub>= 1.2 (benchmark: ASX All Ords Index)<\/p>\n\n\n\n<p><strong>ERP<sub>Australia<\/sub><\/strong><sub> <\/sub>= 4.33%<\/p>\n\n\n\n<p><strong>Expected Return BHP = 4.51% + 1.209 * 4.33%<\/strong> =<strong> 9.745%<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center has-ast-global-color-0-color has-text-color has-link-color wp-elements-f1f9786c78b0cb70e41ff746cb3d39d7\"><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Example Expected Return (CAPM) for a Portfolio<\/strong><\/h2>\n\n\n\n<p>Consider a hypothetical portfolio consisting of the following stocks as at 16\/01\/2025:<\/p>\n\n\n\n<ul>\n<li><strong>US:DUOL<\/strong>: 34% Portfolio weight<\/li>\n\n\n\n<li><strong>ASX:ANZ<\/strong> 33% Portfolio weight<\/li>\n\n\n\n<li><strong>US:JPM<\/strong> 33% Portfolio weight<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\" style=\"font-size:16px\"><table class=\"has-ast-global-color-4-background-color has-background\"><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\"><strong>Company<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Rf<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Beta<sub>Company<\/sub><\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>ERP<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Expected Return (CAPM)<\/strong><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><strong><a href=\"https:\/\/diversiview.online\/ExplorerPage\/US-DUOL\" target=\"_blank\" rel=\"noreferrer noopener\">US:DUOL<\/a><\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\">4.66%<\/td><td class=\"has-text-align-center\" data-align=\"center\">1.525<\/td><td class=\"has-text-align-center\" data-align=\"center\">4.33%<\/td><td class=\"has-text-align-center\" data-align=\"center\">11.263%<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><strong><a href=\"https:\/\/diversiview.online\/ExplorerPage\/ASX-ANZ\" target=\"_blank\" rel=\"noreferrer noopener\">ASX:ANZ<\/a><\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\">4.51%<\/td><td class=\"has-text-align-center\" data-align=\"center\">0.887<\/td><td class=\"has-text-align-center\" data-align=\"center\">4.33%<\/td><td class=\"has-text-align-center\" data-align=\"center\">8.351%<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\"><strong><a href=\"https:\/\/diversiview.online\/ExplorerPage\/US-JPM\" target=\"_blank\" rel=\"noreferrer noopener\">US:JPM<\/a><\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\">4.66%<\/td><td class=\"has-text-align-center\" data-align=\"center\">0.855<\/td><td class=\"has-text-align-center\" data-align=\"center\">4.33%<\/td><td class=\"has-text-align-center\" data-align=\"center\">8.362%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"has-small-font-size\">Note: All values as at 20\/1\/2025<br>CAPM Formula: Expected Return = Rf + Beta * ERP<\/p>\n\n\n\n<p>To Calculate the Portfolio Expected Return, find the weighted average of each stock and add together: <\/p>\n\n\n\n<p class=\"has-text-align-center\">(<strong>Holding 1 Weight % * Expected Return CAPM) + (Holding 2 Weight % * Expected Return CAPM) + (Holding 3 Weight % * Expected Return CAPM<\/strong>)<\/p>\n\n\n\n<p>Weighted Average of <strong>US:DUOL<\/strong>: 34% * 11.263% = <strong>3.829%<\/strong><br>Weighted Average of <strong>ASX:ANZ<\/strong> 33% * 8.351% = <strong>2.756%<\/strong><br>Weighted Average of <strong>US:JPM<\/strong> 33% * 8.362% = <strong>2.759%<\/strong><\/p>\n\n\n\n<p>The sum of the weighted averages <strong>3.829% + 2.756% + 2.759%<\/strong> is: <strong>9.345%<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading has-ast-global-color-0-color has-text-color has-link-color wp-elements-07dc8355070d520ed17ba2775d8a3a35\" style=\"font-size:25px\"><strong>Summary<\/strong><\/h3>\n\n\n\n<p>The CAPM model provides a framework for estimating expected returns based on systematic risk (represented by Beta), which means that other (non-systematic) risks may not be fully captured, particularly for high-growth or more volatile securities. <\/p>\n\n\n\n<p>To view the <strong>Portfolio Expected Return (Historical)<\/strong> for this portfolio example, <a href=\"https:\/\/diversiview.online\/help\/what-are-historical-expected-returns\/\">click here<\/a>.<\/p>\n\n\n\n<p><strong>Note:<\/strong><\/p>\n\n\n\n<p>When calculating using the CAPM formula, the expected return changes as the Rf, Beta, and the ERP change. Diversiview updates securities&#8217; <strong>Beta values weekly<\/strong>, the <strong>Rf rate monthly<\/strong>, and the <strong>ERP twice a year<\/strong>.<\/p>\n\n\n\n<p>To learn how to select your preferred calculation method for expected return in Diversiview, <a href=\"https:\/\/diversiview.online\/help\/?p=1149\">click here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For each investment, the expected return Capital Asset Pricing Model (CAPM) is calculated using the established Capital Asset Pricing Model [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_seopress_robots_primary_cat":"none","_seopress_titles_title":"How Is CAPM Calculated? | Diversiview Help","_seopress_titles_desc":"Learn what the Capital Asset Pricing Model (CAPM) is and how Diversiview calculates the portfolio expected return from these values.","_seopress_robots_index":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[96,5,33],"tags":[],"_links":{"self":[{"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/posts\/1156"}],"collection":[{"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/comments?post=1156"}],"version-history":[{"count":24,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/posts\/1156\/revisions"}],"predecessor-version":[{"id":1717,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/posts\/1156\/revisions\/1717"}],"wp:attachment":[{"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/media?parent=1156"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/categories?post=1156"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/diversiview.online\/help\/wp-json\/wp\/v2\/tags?post=1156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}