Capital Asset Pricing Model (CAPM)
Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like Costco Wholesale Corp. common stock.
Rates of Return
Costco Wholesale Corp., monthly rates of return
| Costco Wholesale Corp. (COST) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceCOST,t1 | DividendCOST,t1 | RCOST,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Sep 30, 2017 | $164.29 | 2,519.36 | ||||
| 1. | Oct 31, 2017 | $161.08 | -1.95% | 2,575.26 | 2.22% | |
| 2. | Nov 30, 2017 | $184.43 | $0.50 | 14.81% | 2,647.58 | 2.81% |
| 3. | Dec 31, 2017 | $186.12 | 0.92% | 2,673.61 | 0.98% | |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | Jul 31, 2023 | $560.67 | 4.14% | 4,588.96 | 4.85% | |
| 71. | Aug 31, 2023 | $549.28 | $1.02 | -1.85% | 4,507.66 | -1.77% |
| Average (R): | 2.02% | 0.95% | ||||
| Standard deviation: | 6.24% | 5.08% | ||||
| Costco Wholesale Corp. (COST) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceCOST,t1 | DividendCOST,t1 | RCOST,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Sep 30, 2017 | $164.29 | 2,519.36 | ||||
| 1. | Oct 31, 2017 | $161.08 | -1.95% | 2,575.26 | 2.22% | |
| 2. | Nov 30, 2017 | $184.43 | $0.50 | 14.81% | 2,647.58 | 2.81% |
| 3. | Dec 31, 2017 | $186.12 | 0.92% | 2,673.61 | 0.98% | |
| 4. | Jan 31, 2018 | $194.87 | 4.70% | 2,823.81 | 5.62% | |
| 5. | Feb 28, 2018 | $190.90 | $0.50 | -1.78% | 2,713.83 | -3.89% |
| 6. | Mar 31, 2018 | $188.43 | -1.29% | 2,640.87 | -2.69% | |
| 7. | Apr 30, 2018 | $197.16 | 4.63% | 2,648.05 | 0.27% | |
| 8. | May 31, 2018 | $198.24 | $0.57 | 0.84% | 2,705.27 | 2.16% |
| 9. | Jun 30, 2018 | $208.98 | 5.42% | 2,718.37 | 0.48% | |
| 10. | Jul 31, 2018 | $218.71 | 4.66% | 2,816.29 | 3.60% | |
| 11. | Aug 31, 2018 | $233.13 | $0.57 | 6.85% | 2,901.52 | 3.03% |
| 12. | Sep 30, 2018 | $234.88 | 0.75% | 2,913.98 | 0.43% | |
| 13. | Oct 31, 2018 | $228.63 | -2.66% | 2,711.74 | -6.94% | |
| 14. | Nov 30, 2018 | $231.28 | $0.57 | 1.41% | 2,760.17 | 1.79% |
| 15. | Dec 31, 2018 | $203.71 | -11.92% | 2,506.85 | -9.18% | |
| 16. | Jan 31, 2019 | $214.63 | 5.36% | 2,704.10 | 7.87% | |
| 17. | Feb 28, 2019 | $218.74 | $0.57 | 2.18% | 2,784.49 | 2.97% |
| 18. | Mar 31, 2019 | $242.14 | 10.70% | 2,834.40 | 1.79% | |
| 19. | Apr 30, 2019 | $245.53 | 1.40% | 2,945.83 | 3.93% | |
| 20. | May 31, 2019 | $239.58 | $0.65 | -2.16% | 2,752.06 | -6.58% |
| 21. | Jun 30, 2019 | $264.26 | 10.30% | 2,941.76 | 6.89% | |
| 22. | Jul 31, 2019 | $275.63 | 4.30% | 2,980.38 | 1.31% | |
| 23. | Aug 31, 2019 | $294.76 | $0.65 | 7.18% | 2,926.46 | -1.81% |
| 24. | Sep 30, 2019 | $288.11 | -2.26% | 2,976.74 | 1.72% | |
| 25. | Oct 31, 2019 | $297.11 | $0.65 | 3.35% | 3,037.56 | 2.04% |
| 26. | Nov 30, 2019 | $299.81 | 0.91% | 3,140.98 | 3.40% | |
| 27. | Dec 31, 2019 | $293.92 | -1.96% | 3,230.78 | 2.86% | |
| 28. | Jan 31, 2020 | $305.52 | 3.95% | 3,225.52 | -0.16% | |
| 29. | Feb 29, 2020 | $281.14 | $0.65 | -7.77% | 2,954.22 | -8.41% |
| 30. | Mar 31, 2020 | $285.13 | 1.42% | 2,584.59 | -12.51% | |
| 31. | Apr 30, 2020 | $303.00 | $0.70 | 6.51% | 2,912.43 | 12.68% |
| 32. | May 31, 2020 | $308.47 | 1.81% | 3,044.31 | 4.53% | |
| 33. | Jun 30, 2020 | $303.21 | -1.71% | 3,100.29 | 1.84% | |
| 34. | Jul 31, 2020 | $325.53 | $0.70 | 7.59% | 3,271.12 | 5.51% |
| 35. | Aug 31, 2020 | $347.66 | 6.80% | 3,500.31 | 7.01% | |
| 36. | Sep 30, 2020 | $355.00 | 2.11% | 3,363.00 | -3.92% | |
| 37. | Oct 31, 2020 | $357.62 | $0.70 | 0.94% | 3,269.96 | -2.77% |
| 38. | Nov 30, 2020 | $391.77 | 9.55% | 3,621.63 | 10.75% | |
| 39. | Dec 31, 2020 | $376.78 | $10.00 | -1.27% | 3,756.07 | 3.71% |
| 40. | Jan 31, 2021 | $352.43 | -6.46% | 3,714.24 | -1.11% | |
| 41. | Feb 28, 2021 | $331.00 | $0.70 | -5.88% | 3,811.15 | 2.61% |
| 42. | Mar 31, 2021 | $352.48 | 6.49% | 3,972.89 | 4.24% | |
| 43. | Apr 30, 2021 | $372.09 | $0.79 | 5.79% | 4,181.17 | 5.24% |
| 44. | May 31, 2021 | $378.27 | 1.66% | 4,204.11 | 0.55% | |
| 45. | Jun 30, 2021 | $395.67 | 4.60% | 4,297.50 | 2.22% | |
| 46. | Jul 31, 2021 | $429.72 | $0.79 | 8.81% | 4,395.26 | 2.27% |
| 47. | Aug 31, 2021 | $455.49 | 6.00% | 4,522.68 | 2.90% | |
| 48. | Sep 30, 2021 | $449.35 | -1.35% | 4,307.54 | -4.76% | |
| 49. | Oct 31, 2021 | $491.54 | $0.79 | 9.56% | 4,605.38 | 6.91% |
| 50. | Nov 30, 2021 | $539.38 | 9.73% | 4,567.00 | -0.83% | |
| 51. | Dec 31, 2021 | $567.70 | 5.25% | 4,766.18 | 4.36% | |
| 52. | Jan 31, 2022 | $505.13 | -11.02% | 4,515.55 | -5.26% | |
| 53. | Feb 28, 2022 | $519.25 | $0.79 | 2.95% | 4,373.94 | -3.14% |
| 54. | Mar 31, 2022 | $575.85 | 10.90% | 4,530.41 | 3.58% | |
| 55. | Apr 30, 2022 | $531.72 | $0.90 | -7.51% | 4,131.93 | -8.80% |
| 56. | May 31, 2022 | $466.22 | -12.32% | 4,132.15 | 0.01% | |
| 57. | Jun 30, 2022 | $479.28 | 2.80% | 3,785.38 | -8.39% | |
| 58. | Jul 31, 2022 | $541.30 | $0.90 | 13.13% | 4,130.29 | 9.11% |
| 59. | Aug 31, 2022 | $522.10 | -3.55% | 3,955.00 | -4.24% | |
| 60. | Sep 30, 2022 | $472.27 | -9.54% | 3,585.62 | -9.34% | |
| 61. | Oct 31, 2022 | $501.50 | $0.90 | 6.38% | 3,871.98 | 7.99% |
| 62. | Nov 30, 2022 | $539.25 | 7.53% | 4,080.11 | 5.38% | |
| 63. | Dec 31, 2022 | $456.50 | -15.35% | 3,839.50 | -5.90% | |
| 64. | Jan 31, 2023 | $511.14 | 11.97% | 4,076.60 | 6.18% | |
| 65. | Feb 28, 2023 | $484.18 | $0.90 | -5.10% | 3,970.15 | -2.61% |
| 66. | Mar 31, 2023 | $496.87 | 2.62% | 4,109.31 | 3.51% | |
| 67. | Apr 30, 2023 | $503.22 | 1.28% | 4,169.48 | 1.46% | |
| 68. | May 31, 2023 | $511.56 | $1.02 | 1.86% | 4,179.83 | 0.25% |
| 69. | Jun 30, 2023 | $538.38 | 5.24% | 4,376.86 | 4.71% | |
| 70. | Jul 31, 2023 | $560.67 | 4.14% | 4,588.96 | 4.85% | |
| 71. | Aug 31, 2023 | $549.28 | $1.02 | -1.85% | 4,507.66 | -1.77% |
| Average (R): | 2.02% | 0.95% | ||||
| Standard deviation: | 6.24% | 5.08% | ||||
Show all
1 Data in US$ per share of common stock, adjusted for splits and stock dividends.
2 Rate of return on common stock of COST during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Variance and Covariance
Costco Wholesale Corp., calculation of variance and covariance of returns
| t | Date | RCOST,t | RS&P 500,t | (RCOST,t–RCOST)2 | (RS&P 500,t–RS&P 500)2 | (RCOST,t–RCOST)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Oct 31, 2017 | -1.95% | 2.22% | 15.78 | 1.61 | -5.04 |
| 2. | Nov 30, 2017 | 14.81% | 2.81% | 163.51 | 3.45 | 23.75 |
| 3. | Dec 31, 2017 | 0.92% | 0.98% | 1.22 | 0.00 | -0.04 |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | Jul 31, 2023 | 4.14% | 4.85% | 4.50 | 15.17 | 8.26 |
| 71. | Aug 31, 2023 | -1.85% | -1.77% | 14.97 | 7.41 | 10.53 |
| Total (Σ): | 2,721.53 | 1,807.09 | 1,443.62 | |||
| t | Date | RCOST,t | RS&P 500,t | (RCOST,t–RCOST)2 | (RS&P 500,t–RS&P 500)2 | (RCOST,t–RCOST)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Oct 31, 2017 | -1.95% | 2.22% | 15.78 | 1.61 | -5.04 |
| 2. | Nov 30, 2017 | 14.81% | 2.81% | 163.51 | 3.45 | 23.75 |
| 3. | Dec 31, 2017 | 0.92% | 0.98% | 1.22 | 0.00 | -0.04 |
| 4. | Jan 31, 2018 | 4.70% | 5.62% | 7.19 | 21.78 | 12.52 |
| 5. | Feb 28, 2018 | -1.78% | -3.89% | 14.44 | 23.48 | 18.41 |
| 6. | Mar 31, 2018 | -1.29% | -2.69% | 10.98 | 13.25 | 12.06 |
| 7. | Apr 30, 2018 | 4.63% | 0.27% | 6.83 | 0.46 | -1.78 |
| 8. | May 31, 2018 | 0.84% | 2.16% | 1.40 | 1.46 | -1.43 |
| 9. | Jun 30, 2018 | 5.42% | 0.48% | 11.55 | 0.22 | -1.59 |
| 10. | Jul 31, 2018 | 4.66% | 3.60% | 6.95 | 7.03 | 6.99 |
| 11. | Aug 31, 2018 | 6.85% | 3.03% | 23.37 | 4.31 | 10.03 |
| 12. | Sep 30, 2018 | 0.75% | 0.43% | 1.61 | 0.27 | 0.66 |
| 13. | Oct 31, 2018 | -2.66% | -6.94% | 21.90 | 62.28 | 36.93 |
| 14. | Nov 30, 2018 | 1.41% | 1.79% | 0.37 | 0.70 | -0.51 |
| 15. | Dec 31, 2018 | -11.92% | -9.18% | 194.32 | 102.59 | 141.19 |
| 16. | Jan 31, 2019 | 5.36% | 7.87% | 11.17 | 47.85 | 23.11 |
| 17. | Feb 28, 2019 | 2.18% | 2.97% | 0.03 | 4.09 | 0.33 |
| 18. | Mar 31, 2019 | 10.70% | 1.79% | 75.32 | 0.71 | 7.30 |
| 19. | Apr 30, 2019 | 1.40% | 3.93% | 0.38 | 8.88 | -1.84 |
| 20. | May 31, 2019 | -2.16% | -6.58% | 17.45 | 56.68 | 31.45 |
| 21. | Jun 30, 2019 | 10.30% | 6.89% | 68.60 | 35.31 | 49.21 |
| 22. | Jul 31, 2019 | 4.30% | 1.31% | 5.21 | 0.13 | 0.83 |
| 23. | Aug 31, 2019 | 7.18% | -1.81% | 26.60 | 7.62 | -14.24 |
| 24. | Sep 30, 2019 | -2.26% | 1.72% | 18.28 | 0.59 | -3.28 |
| 25. | Oct 31, 2019 | 3.35% | 2.04% | 1.77 | 1.19 | 1.45 |
| 26. | Nov 30, 2019 | 0.91% | 3.40% | 1.23 | 6.02 | -2.72 |
| 27. | Dec 31, 2019 | -1.96% | 2.86% | 15.87 | 3.64 | -7.60 |
| 28. | Jan 31, 2020 | 3.95% | -0.16% | 3.72 | 1.24 | -2.15 |
| 29. | Feb 29, 2020 | -7.77% | -8.41% | 95.77 | 87.65 | 91.62 |
| 30. | Mar 31, 2020 | 1.42% | -12.51% | 0.36 | 181.25 | 8.08 |
| 31. | Apr 30, 2020 | 6.51% | 12.68% | 20.19 | 137.67 | 52.73 |
| 32. | May 31, 2020 | 1.81% | 4.53% | 0.05 | 12.80 | -0.76 |
| 33. | Jun 30, 2020 | -1.71% | 1.84% | 13.87 | 0.79 | -3.31 |
| 34. | Jul 31, 2020 | 7.59% | 5.51% | 31.06 | 20.78 | 25.41 |
| 35. | Aug 31, 2020 | 6.80% | 7.01% | 22.84 | 36.67 | 28.94 |
| 36. | Sep 30, 2020 | 2.11% | -3.92% | 0.01 | 23.76 | -0.45 |
| 37. | Oct 31, 2020 | 0.94% | -2.77% | 1.17 | 13.82 | 4.03 |
| 38. | Nov 30, 2020 | 9.55% | 10.75% | 56.70 | 96.11 | 73.82 |
| 39. | Dec 31, 2020 | -1.27% | 3.71% | 10.84 | 7.62 | -9.09 |
| 40. | Jan 31, 2021 | -6.46% | -1.11% | 71.94 | 4.26 | 17.51 |
| 41. | Feb 28, 2021 | -5.88% | 2.61% | 62.43 | 2.75 | -13.10 |
| 42. | Mar 31, 2021 | 6.49% | 4.24% | 19.98 | 10.84 | 14.72 |
| 43. | Apr 30, 2021 | 5.79% | 5.24% | 14.20 | 18.42 | 16.17 |
| 44. | May 31, 2021 | 1.66% | 0.55% | 0.13 | 0.16 | 0.14 |
| 45. | Jun 30, 2021 | 4.60% | 2.22% | 6.66 | 1.61 | 3.28 |
| 46. | Jul 31, 2021 | 8.81% | 2.27% | 46.05 | 1.75 | 8.98 |
| 47. | Aug 31, 2021 | 6.00% | 2.90% | 15.82 | 3.79 | 7.75 |
| 48. | Sep 30, 2021 | -1.35% | -4.76% | 11.34 | 32.58 | 19.22 |
| 49. | Oct 31, 2021 | 9.56% | 6.91% | 56.94 | 35.56 | 45.00 |
| 50. | Nov 30, 2021 | 9.73% | -0.83% | 59.50 | 3.18 | -13.76 |
| 51. | Dec 31, 2021 | 5.25% | 4.36% | 10.44 | 11.63 | 11.02 |
| 52. | Jan 31, 2022 | -11.02% | -5.26% | 170.06 | 38.56 | 80.98 |
| 53. | Feb 28, 2022 | 2.95% | -3.14% | 0.87 | 16.71 | -3.81 |
| 54. | Mar 31, 2022 | 10.90% | 3.58% | 78.88 | 6.90 | 23.32 |
| 55. | Apr 30, 2022 | -7.51% | -8.80% | 90.75 | 95.00 | 92.85 |
| 56. | May 31, 2022 | -12.32% | 0.01% | 205.57 | 0.89 | 13.56 |
| 57. | Jun 30, 2022 | 2.80% | -8.39% | 0.61 | 87.29 | -7.31 |
| 58. | Jul 31, 2022 | 13.13% | 9.11% | 123.41 | 66.59 | 90.65 |
| 59. | Aug 31, 2022 | -3.55% | -4.24% | 30.98 | 26.99 | 28.92 |
| 60. | Sep 30, 2022 | -9.54% | -9.34% | 133.71 | 105.90 | 118.99 |
| 61. | Oct 31, 2022 | 6.38% | 7.99% | 19.02 | 49.49 | 30.68 |
| 62. | Nov 30, 2022 | 7.53% | 5.38% | 30.34 | 19.57 | 24.37 |
| 63. | Dec 31, 2022 | -15.35% | -5.90% | 301.53 | 46.90 | 118.92 |
| 64. | Jan 31, 2023 | 11.97% | 6.18% | 99.01 | 27.29 | 51.98 |
| 65. | Feb 28, 2023 | -5.10% | -2.61% | 50.66 | 12.69 | 25.36 |
| 66. | Mar 31, 2023 | 2.62% | 3.51% | 0.36 | 6.52 | 1.54 |
| 67. | Apr 30, 2023 | 1.28% | 1.46% | 0.55 | 0.26 | -0.38 |
| 68. | May 31, 2023 | 1.86% | 0.25% | 0.03 | 0.49 | 0.11 |
| 69. | Jun 30, 2023 | 5.24% | 4.71% | 10.39 | 14.16 | 12.13 |
| 70. | Jul 31, 2023 | 4.14% | 4.85% | 4.50 | 15.17 | 8.26 |
| 71. | Aug 31, 2023 | -1.85% | -1.77% | 14.97 | 7.41 | 10.53 |
| Total (Σ): | 2,721.53 | 1,807.09 | 1,443.62 | |||
Show all
VarianceCOST = Σ(RCOST,t–RCOST)2 ÷ (71 – 1)
= 2,721.53 ÷ (71 – 1)
= 38.88
VarianceS&P 500 = Σ(RS&P 500,t–RS&P 500)2 ÷ (71 – 1)
= 1,807.09 ÷ (71 – 1)
= 25.82
CovarianceCOST, S&P 500 = Σ(RCOST,t–RCOST)×(RS&P 500,t–RS&P 500) ÷ (71 – 1)
= 1,443.62 ÷ (71 – 1)
= 20.62
Systematic Risk (β) Estimation
| VarianceCOST | 38.88 |
| VarianceS&P 500 | 25.82 |
| CovarianceCOST, S&P 500 | 20.62 |
| Correlation coefficientCOST, S&P 5001 | 0.65 |
| βCOST2 | 0.80 |
| αCOST3 | 1.26% |
Calculations
1 Correlation coefficientCOST, S&P 500
= CovarianceCOST, S&P 500 ÷ (Standard deviationCOST × Standard deviationS&P 500)
= 20.62 ÷ (6.24% × 5.08%)
= 0.65
2 βCOST
= CovarianceCOST, S&P 500 ÷ VarianceS&P 500
= 20.62 ÷ 25.82
= 0.80
3 αCOST
= AverageCOST – βCOST × AverageS&P 500
= 2.02% – 0.80 × 0.95%
= 1.26%
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 4.86% |
| Expected rate of return on market portfolio2 | E(RM) | 13.52% |
| Systematic risk (β) of Costco Wholesale Corp. common stock | βCOST | 0.80 |
| Expected rate of return on Costco Wholesale Corp. common stock3 | E(RCOST) | 11.78% |
1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).
3 E(RCOST) = RF + βCOST [E(RM) – RF]
= 4.86% + 0.80 [13.52% – 4.86%]
= 11.78%