How to Calculate Expected Return on Market?


To calculate the Expected Return on the Market, first, find the value of the the risk free rate of return. This is the return earned by investments in risk free securities. Obtain the value of the stock's market risk premium. This is the difference between the expected return of an investment minus the risk free rate of return. It tells how much extra the investor may be expected to earn over the original amount of the risk free return. Find information on beta, which gives the stock's sensitivity to changes in the market. Review the CAPM formula. It is r(i) = r(f) + B(E(rm) - r(f)). The variable r(i) is the return on the investment, r(f) is the risk free interest rate, B is beta, and E(rm) is the expected return on the market. The term E(rm) - r(f) is the market risk premium. Apply the formula to a company. Perform the calculations with a calculator or a spreadsheet. Assume a company has the following values: r(f) = 3.15 percent, Erm = 10 percent, and B = 0.15. Then the rate of return r(i) = 3.15 + 0.15 * (10 - 3.15) = 3.15 + 0.15 * 6.85 = 4.18 percent.
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