Step 2: Press Enter to get the Result. Solution: Expected Rate of Return is calculated using the CAPM Formula given below. WACC Formula. = the return on risk free investments. CAPM Beta coefficient formula notation. One commonly used method to calculate Re is the Capital Asset Pricing Model (CAPM), which considers the risk-free rate, the market risk premium, and the company’s beta. Calculate the cost of equity (Re). Rf = the risk-free rate of return. 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. It is the return shareholders require based on the company’s equity riskiness. The Capital Asset Pricing Model (CAPM) describes the relationship between the expected return and risk on any asset or portfolio. We dive into a quick example and look at how it can be used to help value a stock. The greater the absolute value of the beta coefficient, the stronger the impact will be. Follow these steps to calculate β in Excel: Obtain the weekly prices of the stock; Obtain the weekly prices of the market index (i. The Logic of the CAPM The CAPM builds on the model of portfolio choice developed by Harrythe CAPM value of a firm knowing the firm beta, expected return on the market, and the risk-free rate. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. data” in case we wish to export and save the data. 00] + 2. CAPM formula = B 1 + B 3 ∗ (B 2 − B 1) ext{B}_{1}+ ext{B}_{3}*( ext{B}_{2}- ext{B}_{1)} B 1 + B 3 ∗ (B 2 − B 1) 6: The expected return of an investment (ER i ext{ER}_ ext{i} ER i. We use it as a discount rate when calculating the net present value of an investment. 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. 5%] Expected return = 11. 4 Inserting Present Cash Flows Using Excel ($ except Cost of. * Now I indicate Stata that the time variable is period:. Solve for Ei by multiplying beta and the difference between. more. Find out more about the capital asset pricing model (CAPM) and the formula for calculating it in Microsoft Excel. 2 x 5) = 10%The formula for the levered beta can be computed by using the following steps: Step 1: Firstly, figure out the unlevered beta or asset beta of the company. To get readers comfortable using the attached WACC Calculator, we will calculate the WACC of Walmart as an example . It is very easy and simple. n = number of periods included. In our example, the value of Beta is 0. 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. This is an open-access Excel template in XLSX format that will be useful for anyone who wants to. 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. #1- Covariance/Variance Method. Step 3: Insert the formula =1+ (1-B6)*B7 in cell B8 to calculate the denominator of the Unlevered Beta Formula. Methods and steps for CAPM assessment. 66 years. #2 -By Slope Method in Excel. S. 0562, and then subtract 1 to get a return of 0. As model auditors, we see this formula all of the time, but it is wrong. 3rd Step: Calculate Beta Using COVARIANCE. It is a historical beta adjusted to reflect the tendency of beta to be mean-reverting – the CAPM’s beta value will move towards the market average, of 1, over time. The above calculation is done before the period under consideration starts, and it is only an estimation. 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. Then your percent change formula takes this form: = (C2-B2)/B2. 4 % Explanation. The stock market has been very volatile in the last few years. Using the CAPM: E(ri) = Rf + βi (E(rm) – Rf) = 4 + (1. 4 % Explanation. P (E8:E108,F8:F108)/VAR. Calculating CAPM in Excel. Pre-conditions or assumptions for the applicability of the Capital Asset Pricing Model. Firstly and most essentially, we need to understand the theoretical formula of WACC which is calculated as follows: WACC Formula Excel. Using the CAPM formula we can find the. This is a quick tutorial on how to estimate the Fama-French 3 Factor Model (FF3) in Excel. In finance, the capital asset pricing model (CAPM) is used to determine the appropriate required rate of return of an asset (or a portfolio). Risk/Reward Ratio = $19 / $53. 2. . Course Curriculum: Objective. Here’s how to calculate the CAPM. Video of the Day Tip. Step 3: Subtract the above to steps and the obtained difference is market risk premium. The CAPM helps investors quantify the expected return after factoring in the risk associated with owning a company’s stock. Cost of Equity Example in Excel (CAPM Approach) Step 1: Find the RFR (risk-free rate) of the market. 96%. * I save the CETES dataset as. 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. Beta is used in the capital asset pricing model (CAPM), which. 1. I review the definitions of realized return as well as normal and abnormal return. 20 in year one and $1. This formula essentially estimates the equity returns of a stock based on the market returns and the company’s correlation to the market. Step 4 – Calculate the Fractional Daily Return. Calculating COE With Excel . Today we are discussing the logic behind it, as well a. 4. There are two ways the SIM can be expressed, either in " raw returns " (aka ordinary returns) or in " excess returns . Calculate the market returns. E / (E+D) = Weightage of equity value. Companies must calculate the rate of return a shareholder can get for their investment and the expected rate dividends can increase. Step 3. Wherein, R i: Expected return on the investment. See moreHere, we will do the same example of the CAPM formula in Excel. Practically any investments you take, it at least carries a low risk. 41%. Step 2: Compute or locate the beta of each company. Finally, enter the last percentage value with is the. In this video, we look at the capital asset pricing model - CAPM for short. Find the risk free rate. 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. That's the % complete figure in the simple formula. more. P(), and VAR. Otherwise, you can calculate it as per Figure 1. So we simply take our current EPS of 9. 132, or 13. The Capital Asset Pricing Model, or CAPM, is a basic theoretical model for determining the expected return on a security or portfolio. Calculate WACC (Weighted Average Cost of Capital) in Excel 2020. 9%. non-systematic). CAPM, Diversification, & Using Excel to Calculate Betas The Capital Asset Pricing Model (CAPM ) • Equilibrium model that underlies all modern financial theory • Derived using principles of diversification with simplified assumptions • Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development (early 1970’s) • Basic. The expected return of the portfolio A + B is 20%. CAPITAL ASSET PRICING MODEL Objectives: After reading this chapter, you should 1. To calculate the market risk premium, you'll need to determine the difference between the expected market return and the risk-free rate. The SML is a straight line that starts from the risk-free rate and has a positive slope equal to the market risk premium (the excess return of the market over the risk-free rate) multiplied by beta. Let us start with a short explanation about CAPM. The CAPM helps investors to figure out the expected return on a particular investment. Find out more about the capital asset pricing model (CAPM) and the formula for calculating it in Microsoft Excel. The CAPM (Capital Asset Pricing Model) determines if an investment is reasonably priced. The video also demonstrat. 064; Required Rate of Return = 6. You can easily calculate the Risk Premium using the Formula in the template provided. Put the formula = (C2 / A2) in cell E2. To calculate the percent difference between two numbers correctly, carry out these steps. The Beta coefficient represents the slope of the line of best fit for each Re – Rf (y) and Rm – Rf (x) excess return pair. Intro: (00:00)Sharpe Ratio. There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient. DCF Formula =CFt / ( 1 +r)t. E ( R M) − R F: The excess expected return of the broad market portfolio B. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. . Pre-tax cost of equity = Post-tax cost of equity ÷ (1 – tax rate). It is basically used to calculate the stock’s expected stock return. The Capital Asset Pricing Model (CAPM) helps to calculate investment risk and what return on investment an investor should expect. Alpha: What It Means in Investing, With Examples. The Dividend Yield is a financial ratio that measures the annual value of dividends received relative to the market value per share of a security. Find the Cost of Debt Determine the cost of debt (Rd). Enter your name and email in the form below and download the free template now! The beta (β) of an investment security (i. gen m_rf = ln(1 + m_Rf). * I save the CETES dataset as. Above, calculation, suggests Microsoft is the better investment as per the Risk/Reward ratio. Step 3: The next step is to calculate the portfolio Beta, which will be used to calculate the expected returns using CAPM. 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. 63 DPS by (6. This is a supplement to the investment courses I teach. Press "Calculate" to obtain expected return, variance, and standard deviation. Figure 16. P() in excel to perform the above calculations. Given the average S&P 500 return of 11. Adjusted the Beta by “2/3 * the Beta we. β can easily be calculated in Excel using the Slope function. How to calculate required rate of return under CAPM model in excel spreadsheetHi guys, in this video I've shown you the calculation of required rate of retur. 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. Step 2: Calculate the Real Rate using the formula. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. Let’s say you’re trying to calculate the cost of equity for an online computer retailer. The steps are; Gather the stock exchange and index data. 48. Step 1: Put the returns of your portfolio and the benchmark index into Excel, and calculate the average returns. 1 Capital market line and CAPM formula Let (σ M,r M) denote the point corresponding to the market portfolio M. A financial modeling tutorial on the CAPM model and how active portfolio managers use the Capital Asset Pricing Model to set expected return on a stock in th. Cost of equity (required rate of return) is one of the most fundamental concepts in corporate finance. The DDM is based on the assumption that the company’s dividends represent the company’s cash flows to its shareholders. . Download the Free Template. 12. The total EPS over the holding period of 3 years is simply the EPS in Year 1, 2 and 3 added together. What does. 61. E (Rm) = refers to the expected return of the. Now we can say that Company A has a lesser cost of capital (WACC) than Company B. . Discount Rate is calculated using the formula given below. 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. The WACC formula is: WACC = (E/V x Re) + ( (D/V x Rd) x (1 – T)) Where: E = market value of the firm’s equity (market cap) D = market value of the firm’s debt. The short term rate of China’s government bills is 2. Again, let us take an example. Check out our website - We have just launched our Excel for. What would $1000 invested in Microsoft be worth today? Currently, Microsoft has a market capitalization of $2. CAPM Beta coefficient formula notation. Here, we will do the same example of the CAPM formula in Excel. The cost of equity is commonly calculated with CAPM (Capital Asset Pricing Model). Now we’ll need to calculate the EPS for every year that we hold XOM, given our growth rate. Step 1 – Download the Stock Prices & Index Data for the past 3 years. 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. where Re is the expected return of the asset, Rf is the risk-free rate of return, and Rm is the expected return of the market. The screegrabs describe the formulae used in the spreadsheet. The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model (CAPM). Therefore, the WACC can be viewed as a break-even return that determines the profitability of a project or an. 95%. Return is the rate of return on your portfolio or investment being measured. It reflects the total market value of all stocks in the index relative to a base period value (November 3, 1995). The screegrabs describe the formulae used in the spreadsheet. The cost of equity is the perceptional cost of investing equity capital in a business. An Example Using the data from the covariance matrix above, this section will show how to carry out a CFA in Excel and to calculate parameter estimates and fit statistics. The formula is: K c = R f + beta x ( K m - R f ) where. In cell E2, enter the formula = (C2 / A2) to render the weight of the first investment. The market annual rate of return is 6%. 7. Enter this into your spreadsheet in cell A4 as "=A1+(A2_(A3-A1))" to calculate the expected return for your investment. For news about the latest Excel for the web updates, visit the. Calculating CAPM Beta. " In cell G33, cell F32 is shown as a. The discount rate element. Calculate the discount rate if the compounding is to be done half-yearly. Follow these steps to calculate a stock’s expected rate of return in Excel: 1. 40%. Discount Rate = T * [ (Future Cash Flow / Present Value) 1/t*n – 1] Discount Rate = 2 * [ ($10,000 / $7,600) 1/2*4 – 1] Discount Rate = 6. The Capital Asset Pricing Model (CAPM) The cost of equity, Ke, comes from the CAPM. CAPM Calculator Excel / Formula. At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). Y-Intercept → Risk-Free Rate (rf)Steps to calculate Equity Beta using the CAPM Model: Step 1: Find out the risk-free return. The data for the Fama-French risk factors is available on Kenneth. For example, if you wanted to figure the return from January 1, 2015 to December 31. 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. Cost Of Equity: The cost of equity is the return a company requires to decide if an investment meets capital return requirements; it is often used as a capital budgeting threshold for required. β is the beta of the investment, which measures an asset's volatility in the market. However, it is up to Mr. 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. 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-to-market value companies versus low. How to calculate the sharpe ratio for investments in Excel, definition and formula explained. ROIC Formula. 038)^8. Consider the following information: Risk-free rate of return = 4%. Find the Cost of Debt Determine the cost of debt (Rd). 4th Step: Determine Expected Return. R f. How to calculate capital asset pricing model in excel. For further help in utilizing this formula, keep these steps in mind: 1. 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. To find the expected return of Tesla we use the CAPM equation modified for Excel syntax as follows: 1. This gives you the fair value price you should pay for a stock. The CAPM analysis needs a series of steps to assess the risks of investing in a stock. The nominal interest rate is also referred to as the coupon rate for fixed-income investments. Step 2: Next, calculate the average return for both stocks: Step 3: After calculating the average, we take a difference between the returns ABC, return, and ABC’s average return similarly between XYZ and XYZ’s return average return. Calculate the Beta coefficient. Buying $1000 In MSFT: If an investor had bought $1000 of MSFT stock 20 years ago, it would be worth $11,674. The capital asset pricing model looks at how the risk premium of a given investment should influence its expected returns. tsset period time variable: period, 1934m1 to 2019m6 delta: 1 month. P (F8:F108) =SLOPE (E8:E108,F8:F108) You could also calculate beta simply by plotting. Therefore, the effective discount rate for David in this case is 6. This is accomplished in Excel by placing the formula = (B3-B2)/B2 in cell C3. E r = R f + [B i x (R m – R rf)] E r = expected. Step 2 – Sort the Dates & Adjusted Closing Prices Step 3 – Prepare a single sheet of Stock Prices Data &. General Motors Company has an expected return of 11%. 70 in year two. Convert the WACC to a decimal from a percentage and add it to one. By accumulating and tracking these over your certification cycle you can maintain your certification status with PMI. The CAPM formula is used for calculating the expected returns of an asset…. What investors expect to earn on their investment in the. Step 1: We first need to calculate the debt-equity ratio. 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. Step 2. To compute the portfolio weight of each investment, repeat the calculation in successive cells, dividing by the value in cell A2. Otherwise, you can calculate it as per Figure 1. 2. Where: NPV = Net Present Value. Taylor. X-Axis → Beta (β) Y-Axis → Expected Return. Here's the formula for this approach using the P/E ratio of a stock: Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio. Yield to Maturity (YTM) = [Annual Coupon + (FV – PV) ÷ Number of Compounding Periods)] ÷ [ (FV + PV) ÷ 2] The components of the yield to maturity (YTM) equation consist of the following inputs: Coupon Payment (C) → Determined by the coupon rate of the bond, or. Variance. β i = investment beta. CAPM Formula with its components. Expected rate of return = Risk-free rate of return + β * (Benchmark return – Risk-free rate of return) = 4% + 1. For a simple example calculation of the cost of equity using CAPM, use the assumptions listed below: Risk-Free Rate: 3%. How to Calculate CAPM in Excel By C. This table summarizes the latest bond ratings and appropriate default spreads for different countries. Equity risk premium = 5%. Alpha: What It Means in Investing, With Examples. 3 * (11% – 4%) = 13. Abnormal return, also known as “excess return,” refers to the unanticipated profits (or losses) generated by a security/stock. 3 * (11% – 4%) = 13. e. CAPM Formula. There are different variations of the intrinsic value formula, but the most “standard” approach is similar to the net present value formula. This cost of equity calculator helps you calculate the cost of equity given the risk free rate, beta and equity risk premium. Understand the concept of beta as a measure of systematic risk of a security. 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. However, It is usually the rate at which the government bonds and securities are available and inflation-adjusted. CAPM Formula. FVj = Net cash flow for the j th period (for the initial “Present” cash flow, j = 0. This CAPM calculator will allow you to quickly find the expected return on a stock using the CAPM. The expected return of an asset can be calculated according to the following formula by the. Calculate the individual present values. Where = asset expected return, = expected risk free return, = asset CAPM beta coefficient, = market expected risk premium. I then use the CAPM to decompose a stock's realized return into its normal. For instance, type "Expected Return (Re)" in cell A1. 10-year treasury Average historical annual excess return for U. E (Rm) = the expected return on the market portfolio. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which equates rates of return to volatility (risk vs reward). The formula is: K c = R f + beta x ( K m - R f ) where. What is the formula for calculating CAPM in Excel? The CAPM. In financial analysis, the SLOPE function can be used to calculate the beta of a stock. 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. In this video we will know how to Calculate CAPM Alpha & CAPM Beta, Jensen Alpha for Stock / Strategy in excelHow to Install the Data Analysis ToolPak in Mi. 15. The CAPM (Capital Asset Pricing Model) determines if an investment is reasonably priced. Cost of debt = 3. The Weighted average cost of capital (WACC) is the average rate that a firm is expected to pay to all creditors, owners, and other capital providers. $$ {\beta}_ {portfolio} = cov (R_p, R_m)/\sigma_m $$. 1%. β: Beta of the investment. The usage of the CAPM is based on the existence of certain assumptions. 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. As an example, a company has a beta of 0. Solve for the asset return using the CAPM formula: Risk-free rate + (beta_ (market return-risk-free rate). . 2. where Re is the expected return of the asset, Rf is the risk-free rate of return, and Rm is the expected return of the market. 4. 064; Required Rate of Return = 6. x̄ = Average of data values of x. Learn how to compute cost of equity, one of the important input for various financial analytical projects as per the CAPM approach. 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. Market Risk Premium = 15% – 4%; Market Risk Premium = 11% Most of the time, we need to base our expected return on the historical figures. Also Read: Beta Coefficient in Finance. Step 2: Estimate the expected return on a risk-free bond. The corresponding formulae are given below. * Now I indicate Stata that the time variable is period:. The above calculation is done before the period under consideration starts, and it. Enter this into your spreadsheet in cell A4 as “=A1+(A2_(A3-A1))” to calculate the expected return for your investment. An asset’s expected return refers to the loss or profit that you anticipate based on its anticipated or known rate of return. The capital asset pricing model (CAPM) equation is. Interest is the cost of utilizing borrowed money. 1) Capital asset pricing model (CAPM) The CAPM is a very popular model as it captures the expected return and the risk of volatility (systematic risk) in those returns. format period %tm. = the return required by investors on a stock. To find the expected return of an asset using CAPM in Excel requires a modified equation using Excel syntax, such as =$C$3+ (C9* ($C$4-$C$3)) CAPM can also be used with other metrics like. Ability to Borrow at a Risk-Free Rate. 21. * I create monthly variable for the months:. Example #2. Our findings justify the continued use of the CAPM by firms in spite of the mounting evidenceExample Calculation with Walmart. Our certifications have different requirements based on the number of PDUs for maintenance. " The SIM formula expressed in raw returns is shown below: R i = α i + β i R m + ε i. Here are the steps to follow when using this WACC calculator: First, enter the Total Equity which is a monetary value. 4. w e – weight of equity. . 5 * (7% – 4%) Expected Rate of Return= 8. Understand the Capital Asset Pricing Model. Portfolio beta is equal to the covariance of the portfolio returns and market returns. CAPM: Here is the step by step approach for calculating Required Return. CAPITAL ASSET PRICING MODEL Objectives: After reading this chapter, you should 1. Interest incurred by company on the cost of debt is admissible expense for tax purpose, therefore cost of debt is multiplied by factor (1. Essentially, the question is, “Is the return on this asset worth the investment?” In this tutorial, we’ll apply the CAPM model to see whether or not a particular stock is worth the investment using a multiple regression. Stock beta: You can calculate the stock beta manually using the formula below, or use the beta found on websites like Bloomberg and Yahoo Finance. Top 3 Formula to Calculate Beta. 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. . P and VAR. 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. For example, if you wanted to figure the return from January 1, 2015 to December 31. Step 4: Press Enter to get the Result. It calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends. Below is an Excel β calculator that you can download and use to calculate β on your own. CAPM is used to find the Re, and WACC tells us the discoun. The risk premium for a specific investment using CAPM is beta times the difference between the returns on a. R f = Risk-free rate of return. This fraction is the beta figure, typically expressed as a decimal value. For Microsoft Corporation. For analyzing the net present value, you will first have to determine the weighted average cost of capital. We go over (in Microsoft Excel) how to arrive at the Risk-Free Rate, how to. You can also easily calculate the CAPM using the formula in the template provided. How to Calculate CAPM? CAPM or Capital Asset Pricing Model helps to calculate the cost of equity for an investment. Capital Market Line - CML: The capital market line (CML) appears in the capital asset pricing model to depict the rates of return for efficient portfolios subject to the risk level ( standard. R e = R f + Beta × Market Risk Premium R e = R f + Beta × ( R m - R f) 15. How to calculate CAPM (capital assets pricing model) in Excel sheet. Use the “=Slope (”the column of price changes percentage of the equity”, “the column of price changes percentage of the index”)” formula in excel to get the rate of change along the regression line, which is the Beta of the equity. The total EPS over the holding period of 3 years is simply the EPS in Year 1, 2 and 3 added together. The Capital Asset Pricing Model (CAPM) states that the expected return on an asset is related to its risk as measured by beta: E (Ri) = Rf + ßi * (E (Rm) – Rf) Or = Rf + ßi * ( risk premium) Where. We provide empirical support for our arguments by developing a method for estimating firms’ project CAPM betas and project returns. The formula for CAPM: Ei = Rf + Bi (Em - Rf) Where Ei = expected return on an investment, Rf = the return on a risk-free asset such as US Treasury bills, Bi = beta of an investment, or the volatility of an investment relative to the overall market, and Em = the expected market return. The portfolio beta is denoted by β. Calculating the RRR involves discounting cash flows to arrive at the net present value (NPV) of an investment.