Calculate the cost of equity (Re). The required rate of return is also known as the minimum acceptable rate of return. Capital Allocation Line - CAL: The capital allocation line (CAL), also known as the capital market link (CML), is a line created on a graph of all possible combinations of risk-free and risky. The Intrinsic Value or Fair Value of stock estimates a stock. It takes inflation and returns into account and features particularly in capital budgeting and investment planning - there’s even a specific Excel function for it. Step 3: Calculate Nominal Risk-Free Rate. To calculate the cost of retained earnings, we can use the price of the stock, the dividend paid by the stock, and the capital gain also called the growth rate of the dividends paid by the stock. . Enter your name and email in the form below and download the free template now! The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets. 5. risk premium = beta × (Rm - Rf), where: R – Expected rate of return of an asset or investment; Rf – Risk-free interest rate, typically taken as the yield on a long-term government bond in the country where the. Beta, the risk-free rate, and CAPM. 98%. What is capital asset pricing model with example. Then, we can divide the $2. Where = risk free return, = constant, = asset CAPM beta coefficient, = asset and market returns covariance, = market. How to Calculate Alpha and Beta in Excel (Step-by-Step) Without any further delay, we will jump into the stepwise procedure to calculate the alpha and beta in Excel. Dividend Per Share Dividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held. Last Update: February 12, 2020. 25 x 7. WACC is calculated with the following equation: WACC: (% Proportion of Equity * Cost of Equity) + (% Proportion of Debt * Cost of Debt * (1 - Tax Rate)) The proportion of equity and. CAPM Formula with its components. The CAPM formula is: Cost of Equity (Ke) = rf + β (Rm – Rf) Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). 0%. CAPM is used to find the Re, and WACC tells us the discoun. 2. Follow these steps to calculate β in Excel: Obtain the weekly prices of the stock; Obtain the weekly prices of the market index (i. Input Bond Assumptions in Excel. Example 1. The unlevered cost of capital is the implied rate of return a company expects to earn on its assets, without the effect of debt. 00 * (1 + 2. Therefore, the Calculation of the Alpha of the mutual fund will be as follows –. The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. Portfolio beta is equal to the covariance of the portfolio returns and market returns. . 038] + [540,000/ ( (1 + . The above calculation is done before the period under consideration starts, and it. The formula you require is already in the post and as you have named the function the same as the formula (CAPM), then add it to the function. 33% of the work has been completed. To calculate the minimum annual return that we will demand as shareholders, and which we will call “Ke”, the CAPM model will be used (“Capital. Financial Modelling with Excel. Learn how to calculate Beta on Microsoft Excel with this step-by-step tutorial! This simple, yet easy to understand video provides you with the ability to ca. Type the following formula in E1: "= (E3-E2)*D1". Solve for Ei by multiplying beta and the difference between. Multistage growth model: The above assumption is not realistic as the expected. Industry Name: Number of firms: Beta : D/E Ratio: Effective Tax rate: Unlevered beta: Cash/Firm value: Unlevered beta corrected for cash: HiLo Risk: Standard deviation of equityKey Takeaways. This CAPM-based approach will take the portfolio return, risk-free rate, beta, and market return, and calculate alpha from these elements: Here is a snippet of the alpha calculator template:Thse steps describe how you can calculate Alpha with Excel (there’s a link to download the tutorial spreadsheet at the bottom). On the other hand, The effective interest rate takes the effect of compounding into account. This is a supplement to the investment courses I teach. Understand the concept of beta as a measure of systematic risk of a security. In this video, I show you how to calculate a stock's expected return using the capital asset pricing model. Beta is a measure of the volatility , or systematic risk , of a security or a portfolio in comparison to the market as a whole. The Capital Asset Pricing Model (CAPM) helps to calculate investment risk and what return on investment an investor should expect. Stocks that are above the line constitute a good risk. Now we can say that Company A has a lesser cost of capital (WACC) than Company B. Where = asset expected return, = expected risk free return, = asset CAPM beta coefficient, = market expected risk premium. Unlevered beta (a. The calculator uses the following formula to calculate the expected return of a security (or a portfolio): E(R i) = R f + [ E(R m) − R f] × β i. Step 3: The next step is to calculate the portfolio Beta, which will be used to calculate the expected returns using CAPM. The DDM is based on the assumption that the company’s dividends represent the company’s cash flows to its shareholders. Rf = refers to the risk-free rate of interest. * I calculate the continuously compounded return from the simple returns:. Here’s how to calculate them –. Use Excel, Yahoo Finance from the US Federal Reserve to calculate the. Input the values into the CAPM formula. 4 % Explanation. Cost of Equity (Ke) = DPS/MPS + r. R m = market portfolio return. Alpha Defined Alpha is computed in relation to the. CAPM is a good means of measuring systematic risk. Calculating CAPM Beta. Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate. Relevance and Uses of Covariance. e. Step 2: Press Enter to get the Result. As a percentage, 33. A standardized beta compares the strength of the effect of each independent variable to the dependent variable. In this video, we go over how to calculate CAPM (Capital Asset Pricing Model). Capital Asset Pricing Model (CAPM). R m: Expected Market return on the security (R m – R f): Market risk premium. CAPM is calculated according to the following formula: Where: Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the. The third step of calculating the WACC in excel is to find the Company's cost of debt using their borrowing rate and effective tax rate. Market Risk Premium = 12% – 4%; Market Risk Premium = 8% For Investment 2. Here are the steps to follow when using this WACC calculator: First, enter the Total Equity which is a monetary value. Below is a screenshot of CFI’s WACC Calculator in Excel, which you can download for free in the form below. Calculate Portfolio Expected return. Re = Rf + β * (Rm. format period %tm. CAPM can be used to evaluate the performance of many investments such funds. weighted average cost of capital formula of Company A = 3/5 * 0. 40%. It is basically used to calculate the stock’s expected stock return. It takes inflation and returns into account and features particularly in capital budgeting and investment planning - there’s even a specific Excel function for it. 5%. See examples, how to calculateThe formula for calculating Covariance is as follows: Covariance = ∑ (x i – x̄) (y i – ȳ) / (n – 1) Where, x & y = data value of x & y respectively. " The SIM formula expressed in raw returns is shown below: R i = α i + β i R m + ε i. , S&P 500 Index) Calculate the weekly returns of the stockCAPM Calculator (Click Here or Scroll Down) The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. r e – cost of equity. These are calculated and added to a new data frame called “capm. stocks Beta of the stock Expected return = risk free rate + (beta x market return premium)The NIFTY 50 index is calculated using a process called the free-float market capitalization-weighted method. Capital Asset Pricing Model, and Cost of Equity. Firstly, we have to create a dataset that must. Introductionn. Excel CAPM Calculation: Portfolio Analysis CAPM or Capital Asset Pricing Model helps to calculate the cost of equity for an investment. MPS = Market Price per Share. Discount Rate is calculated using the formula given below. CAPM CAPM as a Regression • The CAPM puts structure –i. The WACC determines the overall cost of the company’s financing. 1. The usage of the CAPM is based on the existence of certain assumptions. This dividend discount model or DDM model price is the stock’s intrinsic value. Step 3: Insert the formula =1+ (1-B6)*B7 in cell B8 to calculate the denominator of the Unlevered Beta Formula. * I calculate the continuously compounded return from the simple returns:. Cost of Equity = Risk Free Rate + Beta x Risk Premium. The formula for calculating CAPM is as follow: Expected return on a security = Risk-free rate + Beta of the security * (Expected return on market – Risk-free rate)Expected Rate of Return. Calculating after-tax WACC (weighted average cost of capital) in Excel is very common in corporate finance (both undergraduate finance and MBA finance). To calculate the percent difference between two numbers correctly, carry out these steps. Pre-conditions or assumptions for the applicability of the Capital Asset Pricing Model. This cost of equity calculator helps you calculate the cost of equity given the risk free rate, beta and equity risk premium. ones, the expected returns on stocks need not satisfy the CAPM even when expected returns of projects do. Follow an example using SPY and TSLA. 15. 5. The total EPS over the holding period of 3 years is simply the EPS in Year 1, 2 and 3 added together. 64 by (1 + 6%)^5. The term CAPM stands for “Capital Asset Pricing Model” and is used to measure the cost of equity (ke), or expected rate of return, on a particular security or portfolio. 69, and consecutively multiply it by 6% for each year. . To obtain the correct format for calculation we must convert these prices into return percentages for both the index and the stock price. This model is a great way to make predictions abo. 2. 12. What is capital asset pricing model. Interest incurred by company on the cost of debt is admissible expense for tax purpose, therefore cost of debt is multiplied by factor (1. To calculate the intrinsic value of a stock, you estimate a company’s future cash flow, discount it by the compounded inflation/interest rate, and divide the result by the number of shares outstanding. There are three methods commonly used to calculate cost of equity: the capital asset pricing model (CAPM), the dividend discount mode (DDM) and bond yield plus risk premium approach. 21 today based on a price of $283. Where: E (Ri) is the expected return on the capital asset, Rf is the risk-free rate, E (Rm) is the expected return of the market, βi is the beta of the security i. The above equilibrium model for portfolio analysis is called the Capital Asset Pricing Model (CAPM). 15, which can be later used to calculate the Enterprise Value by adding the Cash and Cash Equivalents to our calculated MV of Debt. =C6+C7* (C8-C6) After that, type the following formula in cell C12 and hit ENTER to get the value of Alpha. The market risk premium is part of the Capital Asset Pricing Model (CAPM. • Systematic risk: (1) Cannot be diversified (2) Has to be hedged (3) In equilibrium it is compensated by a risk. • The CAPM assumes only one source of systematic risk: Market Risk. Step 1: Put the returns of your portfolio and the benchmark index into Excel, and calculate the average returns. e. The equation that the model uses is based on the risk-free rate, the beta of the security, and the. 2. Input Bond Assumptions in Excel. This formula essentially estimates the equity returns of a stock based on the market returns and the company’s correlation to the market. Rf is the risk-free rate, the rate of return given by a zero-risk asset such as a Treasury bond or bill. Here’s how to calculate the CAPM. Where: E (Ri) is the expected return on the capital asset, Rf is the risk-free rate, E (Rm) is the expected return of the market, βi is the beta of the security i. The stock has a beta of 2. Expected rate of return = Risk-free rate of return + β * (Benchmark return – Risk-free rate of return) = 4% + 1. Dividend Payout Ratio =. P (F8:F108) =SLOPE (E8:E108,F8:F108) You could also calculate beta simply by plotting. The above calculation is done before the period under consideration starts, and it is only an estimation. Find the Cost of Debt Determine the cost of debt (Rd). For more information visit Download the Free Template. Step 4 – Calculate the Fractional Daily Return. Given the average S&P 500 return of 11. It reflects the total market value of all stocks in the index relative to a base period value (November 3, 1995). The CAPM formula requires the rate of return for the general market, the beta value of the stock, and the risk-free rate. Enter this into your spreadsheet in cell A4 as "=A1+(A2_(A3-A1))" to. #1- Covariance/Variance Method. Therefore, the Calculation of the Alpha of the mutual fund will be. Enter your name and email in the form below and download the free template now! The Capital Asset Pricing Model (CAPM) describes the relationship between expected return and risk of investing in a security. Step 4: Press Enter to get the Result. . “The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk, or the general risks of investing, and expected return on assets, specifically stocks. The book Value per share of Jagriti Group of Companies is $47. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. P(), and VAR. risk premium = beta × (Rm - Rf), where: R – Expected rate of return of an asset or investment; Rf – Risk-free interest rate, typically taken as the yield on a long-term government bond in the country where the. Market capitalization, or market cap, is the total value of a company’s shares held by all investors, including the. Market risk premium is equal to the slope of the security. E (Rm) = refers to the expected return of the. The Capital Asset Pricing Model (CAPM) helps to calculate investment risk and what return on investment an investor should expect. * I save the CETES dataset as. Professional Development Units (PDUs) are one-hour blocks of time that you spend learning, teaching others, or volunteering. Calculating the RRR involves discounting cash flows to arrive at the net present value (NPV) of an investment. Cost of Debt = Interest Expense (1- Tax Rate) Cost of Debt = $800,000 (1-20%) Cost of Debt = $800,000 (0. Us. Step by Step Beta Calculation. 5th Step: Calculate Jensen’s Alpha. * Now I indicate Stata that the time variable is period:. 1. The return on the market is 15% and the risk-free rate is 6%. , how investors form efficient portfolios-to Markowitz’s (1952) mean-variance optimization theory. Calculate the discount rate if the compounding is to be done half-yearly. So, in order to calculate CAPM, you need to use the formula in excel;. 4 % Explanation. =AVERAGE ( (End of Period Price – Start of Period Price) / Start of Period Price) For example, if you have data on the closing prices of the S&P 500 for the past year, you. Note that, except for alpha, this is the equation for CAPM - that is, the beta you get from Sharpe's derivation of equilibrium prices is essentially the. 0%; Term (# of Years) = 8 Years; 2. Today we are discussing the logic behind it, as well a. Enter this into your spreadsheet in cell A4 as “=A1+(A2_(A3-A1))” to calculate the expected return for your investment. Let us start with a short explanation about CAPM. Required Rate of Return = (2. Re = cost of equity. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which equates rates of return to volatility (risk vs reward). Then enter the Total Debt which is also a monetary value. Cost of equity (in percentage) = Risk-free rate of return + [Beta of the investment ∗ (Market's rate of return − Risk-free rate of return)] Related: Cost of Equity: Frequently Asked Questions. Rf = the risk-free rate of return. You can easily calculate the Risk Premium using the Formula in the template provided. Alpha: What It Means in Investing, With Examples. This tutorial. Step 3. CAPM can be used to determine an asset's expected return – which is calculated by multiplying its beta (a measure of volatility) by the expected return of a market index (such as the S&P 500) and adding a risk-free rate. 1 st Step: Prepare Outline and Dataset. R f. I stumpled upon an exercise in an investments book: The data below describe a three-stock financial market that satisfies the single-index model. Example #2. The formula for the CAPM is as follows: Where: Ra = Expected return of the security Rrf = Risk-free rate Ba = Beta (β) of the asset Rm = Expected return of the marketOne of the primary uses of CAPM is to value a business or a portfolio of securities. This is a quick tutorial on how to estimate the Fama-French 3 Factor Model (FF3) in Excel. . 48. In finance, the capital asset pricing model (CAPM) is used to determine the appropriate required rate of return of an asset (or a portfolio). tsset period time variable: period, 1934m1 to 2019m6 delta: 1 month. The Dividend Discount Model (DDM) allows for calculating the cost of equity capital. Example #3. K c is the risk-adjusted discount rate (also known as the Cost of Capital); R f is the rate of a "risk-free" investment, i. Enter this into your spreadsheet in cell A4 as "=A1+(A2_(A3-A1))" to calculate the expected return for your investment. Substituting: 25,000 [ (1 – (1/ ( (1 + . The model’s uses include estimating a firm’s market cost of equity from its beta and the market risk-free rate of return. Calculate the beta of a stock from its historical data. The capital market line is a tangent line and represents asset and investment mixtures. Alpha Calculator. Find out more about the capital asset pricing model (CAPM) and the formula for calculating it in Microsoft Excel. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. Country Default Spreads and Risk Premiums. 2 percent. Put simply, CAPM estimates the price of a high-risk stock by linking the relationship between the risk of the stock and the expected return. The Beta coefficient represents the slope of the line of best fit for each Re – Rf (y) and Rm – Rf (x) excess return pair. The following formula shows how to arrive at the risk-free rate of return: Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1. . ) – CAPM (Intuition) •CAPM – ProjectionsNPV is used to measure the costs and benefits, and ultimately the profitability, of a prospective investment over time. Alpha: What It Means in Investing, With Examples. To determine the dividend’s growth rate from year one to year two, we will use the following formula: However, in some cases, such as in. (Erm – Rf) is the market risk premium, which outlines how much more. Step 3: Insert the formula =1+ (1-B6)*B7 in cell B8 to calculate the denominator of the Unlevered Beta Formula. Return is the rate of return on your portfolio or investment being measured. Click "Line" in the Graph section you will see your Security Market Line. In shorthand this model is expressed as: Return = Rf + Ri + SMB + HML. You can use this Capital Asset Pricing Model (CAPM) Calculator to calculate the expected return of a security based on the risk-free rate, the expected market return and the stock’s beta. CAPM in EXCEL. 2. Calculate the Beta coefficient. Beta is used in the capital asset pricing model (CAPM), which. 4. CAPM assumes investors hold diversified portfolios and that they can borrow and lend at a risk-free rate, among other assumptions. CAPM suggests. Start by figuring out a given stock’s risk-free rate of return. The cost of equity is commonly calculated with CAPM (Capital Asset Pricing Model). Ability to Borrow at a Risk-Free Rate. What is the formula for calculating CAPM in Excel? The CAPM. D = Debt market value. It will return the slope of the linear regression line through the data points in known_y’s and known_x’s. The CAPM formula can be used to calculate the cost of equity, where the formula used is: Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return). Calculating the cost of equity using the CAPM. The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model (CAPM). data” in case we wish to export and save the data. How to use the calculator: Enter the probability, return on Stock A, and return on Stock B, for each state. Adjusted beta tends to estimate a security’s future beta. . Step 1: Insert the input data available from the website of the central bank of your country. Beta is used in the capital asset pricing model (CAPM), which. For a simple example calculation of the cost of equity using CAPM, use the assumptions listed below: Risk-Free Rate: 3%. Step 2. Interest is the cost of utilizing borrowed money. The Beta coefficient represents the slope of the line of best fit for each Re – Rf (y) and Rm – Rf (x) excess return pair. The capital asset pricing model (CAPM) is used to calculate expected returns given the cost of capital and risk of assets. Examples of Beta Formula. P() in excel to perform the above calculations. 80% of your funds are invested in A. E r = R f + [B i x (R m – R rf)] E r = expected. For example, if you wanted to figure the return from January 1, 2015 to December 31. Industry Name: Number of firms: Beta : D/E Ratio: Effective Tax rate: Unlevered beta: Cash/Firm value: Unlevered beta corrected for cash: HiLo Risk: Standard deviation of equity3. In effect, the SML displays the expected return on an individual security at different levels of systematic risk. This CAPM calculator will allow you to quickly find the expected return on a stock using the CAPM. It can further be used for financial ratio like – Sharpe Ratio and others. Step 1: We first need to calculate the debt-equity ratio. 2 percent. Specific premium forms can also be calculated separately, known as the market risk premium formula and Risk Premium formula on a Stock using CAPM Using CAPM The Capital Asset Pricing Model (CAPM) defines the expected return from a portfolio of various securities with varying degrees. I provide a short explanation of the CAPM first, but you can just scroll down to the calculator if you already. Now that each monthly return is in column C, you can calculate the average of the monthly returns in cell C39 and the standard deviation of returns in cell C40. BETA FORMULA = COVAR (D1: D749; E1: E749) / VAR (E1: E749) The. 4th Step: Determine Expected Return. Book Value per share = ($2,10,000- $45,000)/3500. The Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset. P (E8:E108,F8:F108)/VAR. , the rate at which investing in the market at. Capital Asset Pricing Model - CAPM: The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. Where, DPS = Dividend Per Share. The Fama-French model aims to describe stock returns through three factors: (1) market risk, (2) the outperformance of small-cap companies relative to large-cap companies, and (3) the outperformance of high book. Quick and easy way to calculate Alpha, Beta and R-Squared We show how to do a regression calculating alpha and beta in CAPM We find that Tesla has a beta of 0. Cost of Equity Example in Excel (CAPM Approach) Step 1: Find the RFR (risk-free rate) of the market. CAPM Formula. The formula used to calculate the cost of preferred stock with growth is as follows: kp, Growth = [$4. There are two common ways of estimating the cost of debt. How to Calculate CAPM? CAPM or Capital Asset Pricing Model helps to calculate the cost of equity for an investment. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. 66 years. Using the CAPM formula we can find the expected return for an asset. Below is the expanded formula for the CAPM. S. The CAPM formula is used for calculating the expected returns of an asset…. The data for the Fama-French risk factors is available on Kenneth. How to Calculate CAPM in Excel By C. 9, the risk-free rate is 1 percent and the expected return on the. This enables one to define a matrix and refer to it by name. Abnormal return, also known as “excess return,” refers to the unanticipated profits (or losses) generated by a security/stock. The risk-free rate is the current rate of return on. Otherwise, you can calculate it as per Figure 1. Step 2: Calculate the Real Rate using the formula. Real world example of the the CAPM using Microsoft Excel and regression analysis. Then, calculate the beta of the portfolio using a weighted average of all the securities. . Step 2: Next, determine the company’s debt value from its balance sheet. Solution: Step 1: Calculation of Er of Portfolio. To calculate the expected return on assets, you must utilize the CAPM formula: Expected return = risk-free rate + volatility/beta * (market return - risk-free rate). 0%) / $50. D 1 = Expected dividend per share to be paid next year; k = Investor’s required rate of return g = Expected dividend growth rate There are basically two forms of the model: Stable model: As per the model, the dividends are assumed to grow at the same rate. It compares the risk of an unlevered company to the risk of the market. The value of an investment is calculated by subtracting all current long-term liabilities, those due within the year, from the company. E (Rm) = the expected return on the market portfolio. e. CAPM Formula. . The capital asset pricing model looks at how the risk premium of a given investment should influence its expected returns. We provide empirical support for our arguments by developing a method for estimating firms’ project CAPM betas and project returns. Check out our website - have just launched our Excel for Beginner's course, helping you harness the power of Excel qui. . At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). The market risk premium is part of the Capital Asset Pricing Model (CAPM) which analysts and investors use to calculate the acceptable rate of return for an investment. The weighting and cost of capital is calculated on the first tab entitled WACC Summary with the cost of equity calculated in the second tab using the CAPM method and the after-tax cost. This gives you the fair value price you should pay for a stock. The table also includes standard deviation which is the next data component needed when building out the efficient frontier. See all valuation resources. How do you calculate CAPM in Excel? Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). E r = R f + [B i x (R m – R rf)] E r = expected return of investment; R f = risk free rate; B i – beta of investment; R m = Expected return on the. The CAPM helps investors to figure out the expected return on a particular investment. Check out our website - We have just launched our Excel for. A function is designed to return an output. P and VAR. Once you have found all of the above values, you can calculate the stock’s estimated return using the CAPM formula. So we have calculated the expected return using the CAPM approach as follows: E r = R f + β (R m – R f) E r = 4+1. Face Value of Bond = $1,000; Current Market Price of Bond = $1,025; Annual Coupon Rate (%) = 6. Ivan Kitov. Understand the Capital Asset Pricing Model. 40%. WACC assumes the current capital. There are two ways of calculating beta with Excel – the first uses the variance and covariance functions, while the second uses the slope function. Given the average S&P 500 return of 11. Return on Invested Capital is calculated by taking into account the cost of the investment and the returns generated. To calculate the weight of the initial investment, Investment Value, you need to divide Investment Value with Portfolio Value. Investors always prefer to have the highest possible rate of return. . Assess the risk-free rate of your asset. 3. There are several R code flows to calculate portfolio beta but first let’s have a look at the equation. In the first row, enter column labels: • A1: Investment • B1: Gain A • C1: Probability of Gain A • D1: Gain B • E1: Probability of Gain B • F1: Expected Rate of Return. The expected three-month return on the mutual fund. CAPM describes the relationship between risk and expected return and that is used in the pricing of risky securities. Input the values into the CAPM formula. There are two ways the SIM can be expressed, either in " raw returns " (aka ordinary returns) or in " excess returns . The Capital Asset Pricing Model * Measures risk in terms on non-diversifiable variance * Relates expected returns to this risk measure. Pre-tax cost of equity = Post-tax cost of equity ÷ (1 – tax rate). 2 percent. Step 4: Next, calculate the expected rate of return by using risk-free rate (step 1), market risk premium (step 2) and portfolio beta (step 3) as shown below.