How Does Scenarios Calculate Forward-Looking Returns Using the CAPM Expected Returns ?

When using CAPM expected returns YCharts estimates the future value of an investment using the Capital Asset Pricing Model (CAPM). CAPM is a foundational financial model that evaluates whether a security’s potential return adequately compensates for its level of risk compared to the broader market.

YCharts applies the formula below to each individual holding within a portfolio, based on its historical beta (a measure of volatility relative to the market), the risk-free rate, and the historical average return of a relevant market benchmark. Each holding’s expected return is then weighted according to its allocation in the portfolio. The annualized return is then used to estimate the portfolio’s hypothetical future value over a selected time horizon, assuming compounding returns.

CAPM Expected Return = Risk-Free Rate + [5-Year Security Beta × (Annualized 5-Year Average Return of Benchmark – Risk-Free Rate)]