CF LAB

Security market line

CAPM

For learning purposes only. Do not use this calculator or its data to make investment decisions. Results are simplified teaching examples, and company figures may be incomplete or out of date.

What is this?

The Security Market Line answers one question: how much return should investors demand from a stock, given how risky it is? Here risk means beta (β): how much the stock moves when the whole market moves. Safer stocks can offer less; riskier stocks must offer more.

Start with the made-up example, or pick a real PSX company to look back: did its share earn more or less than CAPM required for its beta?

How to read the chart

  • The blue line is the fair return for every level of beta.
  • The blue dot is the return your stock should earn.
  • The orange triangle is what an analyst expects it to earn (for a real company: what its share actually returned).
  • Triangle above the line = a bargain (undervalued), or for a real company, it beat CAPM. Below = overpriced, or it fell short.
Chart ↓
Required return
17.00%
The minimum yearly return investors should demand for this stock's level of risk.
Market premium
5.00%
Analyst forecast
19.00%
Extra return α
+2.00 pts
Undervalued
What this means

Try this
How it’s calculated
About the data: sources and method

  • Prices: daily closing prices from the Pakistan Stock Exchange data portal, downloaded automatically every Saturday. The market is the KSE-100 Price Return index (KSE100PR), which, like share prices, leaves out dividends.
  • Returns: each weekly or monthly return uses the last closing price in that week or month: price ÷ previous price − 1. The current, unfinished week or month is not used.
  • No price adjustments: prices are as PSX reports them, so bonus shares, splits and dividends make a share price drop. A day when a share fell more than 11% while the market moved less than 5% is treated as one of these events, and the week or month containing it is left out (listed above for each company).
  • Yearly figures: average return × 52 (weekly) or × 12 (monthly); volatility × √52 or × √12. These are simple averages, not compound growth. Variances and covariances divide by n − 1.
  • Beta: covariance of the share’s returns with the index’s returns ÷ variance of the index’s returns, the same method as the Beta calculator.
  • Not data: the risk-free rate is your assumption, held constant over the period.
  • Rounding: figures loaded into the boxes are rounded to the decimals shown, and every calculation uses exactly those numbers.