What risk-free rate should I use in CAPM?

The 10-year U.S. Treasury yield is the most common choice for long-term valuations. For shorter horizons, a 5-year Treasury may be more appropriate. Always use the yield as of your valuation date, not a historical average.

What is a typical equity risk premium?

The U.S. equity risk premium is generally estimated at 4-6% by practitioners. Damodaran's annual implied ERP survey for the S&P 500 is a widely cited source. Emerging market ERPs are typically higher.

How does a beta above 1 affect cost of equity?

A beta above 1 means the stock is more volatile than the market. A beta of 1.5 with a 5% ERP adds 7.5% above the risk-free rate as the required return, significantly discounting future cash flows.

Cost of Equity Calculator

Calculate the cost of equity for a company using the Capital Asset Pricing Model (CAPM), which relates expected return to systematic risk.

By AbraCalc Editorial Team · Reviewed by AbraCalc Methodology Review · Last reviewed: 2026-06-25

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How to use this tool

Enter risk-free rate, beta (β) and expected market return in the fields above.
Results update instantly as you type — or click Calculate.
Read your cost of equity and the full breakdown beneath it.

⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.

Formula

CAPM: K_e = R_f + β × (R_m − R_f)

Where R_f is the risk-free rate, β is beta, and R_m is the expected market return.

How it works

The Capital Asset Pricing Model (CAPM) estimates the cost of equity by adding a risk premium — beta multiplied by the market risk premium — to the risk-free rate. Beta measures a stock's volatility relative to the overall market; a beta above 1 indicates greater volatility than the market.

This calculator uses the standard single-factor CAPM. It assumes markets are efficient and that beta fully captures systematic risk, which are simplifications that may not hold in all real-world situations.

Worked example

Technology Stock with Beta 1.2

Risk-free rate = 3%, Beta = 1.2, Expected market return = 10%.
Market Risk Premium = 10% − 3% = 7%.
Equity Risk Premium = 1.2 × 7% = 8.4%.
Cost of Equity = 3% + 8.4% = 11.4%.

The cost of equity is 11.4%, meaning investors require an 11.4% annual return to compensate for the stock's risk.

Common mistakes to avoid

Using a short-term T-bill rate as the risk-free rate instead of a long-term Treasury yield (10- or 20-year), understating the risk-free benchmark and distorting the equity risk premium.
Plugging in a historical beta from a period that does not reflect the company's current business risk (e.g., pre-restructuring beta for a heavily deleveraged firm).
Confusing the market risk premium (Rm - Rf) with the total market return Rm, which doubles the risk premium and dramatically overstates the cost of equity.

Key terms

Cost of Equity (Ke): The return that equity investors require to compensate for the risk of investing in a company's stock.
Beta (β): A measure of a stock's volatility relative to the overall market; β = 1 means the stock moves with the market.
Risk-Free Rate (Rf): The theoretical return of an investment with zero risk, typically approximated by government Treasury bill yields.
Market Risk Premium: The excess return of the overall stock market above the risk-free rate, representing the reward for investing in equities.
CAPM: Capital Asset Pricing Model — a model that describes the relationship between systematic risk and expected return for assets.

Frequently asked questions

What risk-free rate should I use in CAPM?: The 10-year U.S. Treasury yield is the most common choice for long-term valuations. For shorter horizons, a 5-year Treasury may be more appropriate. Always use the yield as of your valuation date, not a historical average.
What is a typical equity risk premium?: The U.S. equity risk premium is generally estimated at 4-6% by practitioners. Damodaran's annual implied ERP survey for the S&P 500 is a widely cited source. Emerging market ERPs are typically higher.
How does a beta above 1 affect cost of equity?: A beta above 1 means the stock is more volatile than the market. A beta of 1.5 with a 5% ERP adds 7.5% above the risk-free rate as the required return, significantly discounting future cash flows.