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 Diageo PLC common stock.
Rates of Return
Diageo PLC, monthly rates of return
| Diageo PLC (DEO) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceDEO,t1 | DividendDEO,t1 | RDEO,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jul 31, 2008 | $70.38 | 1,267.38 | ||||
| 1. | Aug 31, 2008 | $74.40 | 5.71% | 1,282.83 | 1.22% | |
| 2. | Sep 30, 2008 | $68.86 | $1.5526 | -5.36% | 1,166.36 | -9.08% |
| 3. | Oct 31, 2008 | $62.19 | -9.69% | 968.75 | -16.94% | |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | May 31, 2014 | $128.79 | 4.89% | 1,923.57 | 2.10% | |
| 71. | Jun 30, 2014 | $127.27 | -1.18% | 1,960.23 | 1.91% | |
| Average (R): | 1.25% | 0.74% | ||||
| Standard deviation: | 5.38% | 5.02% | ||||
| Diageo PLC (DEO) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceDEO,t1 | DividendDEO,t1 | RDEO,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jul 31, 2008 | $70.38 | 1,267.38 | ||||
| 1. | Aug 31, 2008 | $74.40 | 5.71% | 1,282.83 | 1.22% | |
| 2. | Sep 30, 2008 | $68.86 | $1.5526 | -5.36% | 1,166.36 | -9.08% |
| 3. | Oct 31, 2008 | $62.19 | -9.69% | 968.75 | -16.94% | |
| 4. | Nov 30, 2008 | $56.37 | -9.36% | 896.24 | -7.48% | |
| 5. | Dec 31, 2008 | $56.74 | 0.66% | 903.25 | 0.78% | |
| 6. | Jan 31, 2009 | $54.34 | -4.23% | 825.88 | -8.57% | |
| 7. | Feb 28, 2009 | $46.49 | -14.45% | 735.09 | -10.99% | |
| 8. | Mar 31, 2009 | $44.75 | $0.792 | -2.04% | 797.87 | 8.54% |
| 9. | Apr 30, 2009 | $47.85 | 6.93% | 872.81 | 9.39% | |
| 10. | May 31, 2009 | $54.56 | 14.02% | 919.14 | 5.31% | |
| 11. | Jun 30, 2009 | $57.25 | 4.93% | 919.32 | 0.02% | |
| 12. | Jul 31, 2009 | $62.38 | 8.96% | 987.48 | 7.41% | |
| 13. | Aug 31, 2009 | $62.04 | -0.55% | 1,020.62 | 3.36% | |
| 14. | Sep 30, 2009 | $61.49 | $1.4453 | 1.44% | 1,057.08 | 3.57% |
| 15. | Oct 31, 2009 | $65.02 | 5.74% | 1,036.19 | -1.98% | |
| 16. | Nov 30, 2009 | $67.61 | 3.98% | 1,095.63 | 5.74% | |
| 17. | Dec 31, 2009 | $69.41 | 2.66% | 1,115.10 | 1.78% | |
| 18. | Jan 31, 2010 | $67.19 | -3.20% | 1,073.87 | -3.70% | |
| 19. | Feb 28, 2010 | $65.28 | -2.84% | 1,104.49 | 2.85% | |
| 20. | Mar 31, 2010 | $67.45 | $0.9161 | 4.73% | 1,169.43 | 5.88% |
| 21. | Apr 30, 2010 | $68.14 | 1.02% | 1,186.69 | 1.48% | |
| 22. | May 31, 2010 | $61.28 | -10.07% | 1,089.41 | -8.20% | |
| 23. | Jun 30, 2010 | $62.74 | 2.38% | 1,030.71 | -5.39% | |
| 24. | Jul 31, 2010 | $69.88 | 11.38% | 1,101.60 | 6.88% | |
| 25. | Aug 31, 2010 | $65.50 | -6.27% | 1,049.33 | -4.74% | |
| 26. | Sep 30, 2010 | $69.01 | $1.4638 | 7.59% | 1,141.20 | 8.76% |
| 27. | Oct 31, 2010 | $74.00 | 7.23% | 1,183.26 | 3.69% | |
| 28. | Nov 30, 2010 | $71.66 | -3.16% | 1,180.55 | -0.23% | |
| 29. | Dec 31, 2010 | $74.33 | 3.73% | 1,257.64 | 6.53% | |
| 30. | Jan 31, 2011 | $76.80 | 3.32% | 1,286.12 | 2.26% | |
| 31. | Feb 28, 2011 | $78.26 | 1.90% | 1,327.22 | 3.20% | |
| 32. | Mar 31, 2011 | $76.22 | $0.996 | -1.33% | 1,325.83 | -0.10% |
| 33. | Apr 30, 2011 | $81.37 | 6.76% | 1,363.61 | 2.85% | |
| 34. | May 31, 2011 | $85.09 | 4.57% | 1,345.20 | -1.35% | |
| 35. | Jun 30, 2011 | $81.87 | -3.78% | 1,320.64 | -1.83% | |
| 36. | Jul 31, 2011 | $81.24 | -0.77% | 1,292.28 | -2.15% | |
| 37. | Aug 31, 2011 | $80.26 | -1.21% | 1,218.89 | -5.68% | |
| 38. | Sep 30, 2011 | $75.93 | $1.6309 | -3.36% | 1,131.42 | -7.18% |
| 39. | Oct 31, 2011 | $82.88 | 9.15% | 1,253.30 | 10.77% | |
| 40. | Nov 30, 2011 | $85.61 | 3.29% | 1,246.96 | -0.51% | |
| 41. | Dec 31, 2011 | $87.42 | 2.11% | 1,257.60 | 0.85% | |
| 42. | Jan 31, 2012 | $88.59 | 1.34% | 1,312.41 | 4.36% | |
| 43. | Feb 29, 2012 | $95.56 | $1.0482 | 9.05% | 1,365.68 | 4.06% |
| 44. | Mar 31, 2012 | $96.50 | 0.98% | 1,408.47 | 3.13% | |
| 45. | Apr 30, 2012 | $101.12 | 4.79% | 1,397.91 | -0.75% | |
| 46. | May 31, 2012 | $95.34 | -5.72% | 1,310.33 | -6.27% | |
| 47. | Jun 30, 2012 | $103.07 | 8.11% | 1,362.16 | 3.96% | |
| 48. | Jul 31, 2012 | $106.90 | 3.72% | 1,379.32 | 1.26% | |
| 49. | Aug 31, 2012 | $109.22 | 2.17% | 1,406.58 | 1.98% | |
| 50. | Sep 30, 2012 | $112.73 | $1.7084 | 4.78% | 1,440.67 | 2.42% |
| 51. | Oct 31, 2012 | $114.24 | 1.34% | 1,412.16 | -1.98% | |
| 52. | Nov 30, 2012 | $119.57 | 4.67% | 1,416.18 | 0.28% | |
| 53. | Dec 31, 2012 | $116.58 | -2.50% | 1,426.19 | 0.71% | |
| 54. | Jan 31, 2013 | $119.30 | 2.33% | 1,498.11 | 5.04% | |
| 55. | Feb 28, 2013 | $119.71 | $1.1272 | 1.29% | 1,514.68 | 1.11% |
| 56. | Mar 31, 2013 | $125.84 | 5.12% | 1,569.19 | 3.60% | |
| 57. | Apr 30, 2013 | $122.20 | -2.89% | 1,597.57 | 1.81% | |
| 58. | May 31, 2013 | $118.26 | -3.22% | 1,630.74 | 2.08% | |
| 59. | Jun 30, 2013 | $114.95 | -2.80% | 1,606.28 | -1.50% | |
| 60. | Jul 31, 2013 | $125.33 | 9.03% | 1,685.73 | 4.95% | |
| 61. | Aug 31, 2013 | $122.68 | $1.7925 | -0.68% | 1,632.97 | -3.13% |
| 62. | Sep 30, 2013 | $127.08 | 3.59% | 1,681.55 | 2.97% | |
| 63. | Oct 31, 2013 | $127.59 | 0.40% | 1,756.54 | 4.46% | |
| 64. | Nov 30, 2013 | $127.67 | 0.06% | 1,805.81 | 2.80% | |
| 65. | Dec 31, 2013 | $132.42 | 3.72% | 1,848.36 | 2.36% | |
| 66. | Jan 31, 2014 | $120.05 | -9.34% | 1,782.59 | -3.56% | |
| 67. | Feb 28, 2014 | $125.71 | $1.2986 | 5.80% | 1,859.45 | 4.31% |
| 68. | Mar 31, 2014 | $124.59 | -0.89% | 1,872.34 | 0.69% | |
| 69. | Apr 30, 2014 | $122.78 | -1.45% | 1,883.95 | 0.62% | |
| 70. | May 31, 2014 | $128.79 | 4.89% | 1,923.57 | 2.10% | |
| 71. | Jun 30, 2014 | $127.27 | -1.18% | 1,960.23 | 1.91% | |
| Average (R): | 1.25% | 0.74% | ||||
| Standard deviation: | 5.38% | 5.02% | ||||
Show all
1 Data in US$ per share of common stock, adjusted for splits and stock dividends.
2 Rate of return on common stock of DEO during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Variance and Covariance
Diageo PLC, calculation of variance and covariance of returns
| t | Date | RDEO,t | RS&P 500,t | (RDEO,t–RDEO)2 | (RS&P 500,t–RS&P 500)2 | (RDEO,t–RDEO)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Aug 31, 2008 | 5.71% | 1.22% | 19.87 | 0.23 | 2.12 |
| 2. | Sep 30, 2008 | -5.36% | -9.08% | 43.74 | 96.49 | 64.96 |
| 3. | Oct 31, 2008 | -9.69% | -16.94% | 119.69 | 312.80 | 193.50 |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | May 31, 2014 | 4.89% | 2.10% | 13.26 | 1.85 | 4.95 |
| 71. | Jun 30, 2014 | -1.18% | 1.91% | 5.93 | 1.35 | -2.83 |
| Total (Σ): | 2,025.99 | 1,765.03 | 1,405.57 | |||
| t | Date | RDEO,t | RS&P 500,t | (RDEO,t–RDEO)2 | (RS&P 500,t–RS&P 500)2 | (RDEO,t–RDEO)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Aug 31, 2008 | 5.71% | 1.22% | 19.87 | 0.23 | 2.12 |
| 2. | Sep 30, 2008 | -5.36% | -9.08% | 43.74 | 96.49 | 64.96 |
| 3. | Oct 31, 2008 | -9.69% | -16.94% | 119.69 | 312.80 | 193.50 |
| 4. | Nov 30, 2008 | -9.36% | -7.48% | 112.63 | 67.71 | 87.33 |
| 5. | Dec 31, 2008 | 0.66% | 0.78% | 0.36 | 0.00 | -0.02 |
| 6. | Jan 31, 2009 | -4.23% | -8.57% | 30.07 | 86.67 | 51.05 |
| 7. | Feb 28, 2009 | -14.45% | -10.99% | 246.50 | 137.75 | 184.27 |
| 8. | Mar 31, 2009 | -2.04% | 8.54% | 10.85 | 60.79 | -25.68 |
| 9. | Apr 30, 2009 | 6.93% | 9.39% | 32.19 | 74.80 | 49.07 |
| 10. | May 31, 2009 | 14.02% | 5.31% | 163.04 | 20.83 | 58.28 |
| 11. | Jun 30, 2009 | 4.93% | 0.02% | 13.51 | 0.52 | -2.66 |
| 12. | Jul 31, 2009 | 8.96% | 7.41% | 59.39 | 44.49 | 51.41 |
| 13. | Aug 31, 2009 | -0.55% | 3.36% | 3.24 | 6.82 | -4.70 |
| 14. | Sep 30, 2009 | 1.44% | 3.57% | 0.04 | 8.00 | 0.53 |
| 15. | Oct 31, 2009 | 5.74% | -1.98% | 20.13 | 7.40 | -12.20 |
| 16. | Nov 30, 2009 | 3.98% | 5.74% | 7.45 | 24.93 | 13.63 |
| 17. | Dec 31, 2009 | 2.66% | 1.78% | 1.98 | 1.07 | 1.46 |
| 18. | Jan 31, 2010 | -3.20% | -3.70% | 19.83 | 19.72 | 19.77 |
| 19. | Feb 28, 2010 | -2.84% | 2.85% | 16.78 | 4.44 | -8.63 |
| 20. | Mar 31, 2010 | 4.73% | 5.88% | 12.06 | 26.38 | 17.84 |
| 21. | Apr 30, 2010 | 1.02% | 1.48% | 0.05 | 0.54 | -0.17 |
| 22. | May 31, 2010 | -10.07% | -8.20% | 128.18 | 79.95 | 101.23 |
| 23. | Jun 30, 2010 | 2.38% | -5.39% | 1.27 | 37.60 | -6.92 |
| 24. | Jul 31, 2010 | 11.38% | 6.88% | 102.54 | 37.63 | 62.11 |
| 25. | Aug 31, 2010 | -6.27% | -4.74% | 56.58 | 30.13 | 41.29 |
| 26. | Sep 30, 2010 | 7.59% | 8.76% | 40.19 | 64.18 | 50.79 |
| 27. | Oct 31, 2010 | 7.23% | 3.69% | 35.72 | 8.65 | 17.58 |
| 28. | Nov 30, 2010 | -3.16% | -0.23% | 19.50 | 0.95 | 4.30 |
| 29. | Dec 31, 2010 | 3.73% | 6.53% | 6.11 | 33.48 | 14.30 |
| 30. | Jan 31, 2011 | 3.32% | 2.26% | 4.28 | 2.31 | 3.15 |
| 31. | Feb 28, 2011 | 1.90% | 3.20% | 0.42 | 6.01 | 1.59 |
| 32. | Mar 31, 2011 | -1.33% | -0.10% | 6.70 | 0.72 | 2.20 |
| 33. | Apr 30, 2011 | 6.76% | 2.85% | 30.28 | 4.43 | 11.59 |
| 34. | May 31, 2011 | 4.57% | -1.35% | 11.01 | 4.38 | -6.95 |
| 35. | Jun 30, 2011 | -3.78% | -1.83% | 25.39 | 6.60 | 12.95 |
| 36. | Jul 31, 2011 | -0.77% | -2.15% | 4.10 | 8.36 | 5.85 |
| 37. | Aug 31, 2011 | -1.21% | -5.68% | 6.05 | 41.25 | 15.80 |
| 38. | Sep 30, 2011 | -3.36% | -7.18% | 21.32 | 62.73 | 36.57 |
| 39. | Oct 31, 2011 | 9.15% | 10.77% | 62.39 | 100.57 | 79.22 |
| 40. | Nov 30, 2011 | 3.29% | -0.51% | 4.16 | 1.56 | -2.55 |
| 41. | Dec 31, 2011 | 2.11% | 0.85% | 0.74 | 0.01 | 0.09 |
| 42. | Jan 31, 2012 | 1.34% | 4.36% | 0.01 | 13.07 | 0.30 |
| 43. | Feb 29, 2012 | 9.05% | 4.06% | 60.79 | 10.99 | 25.85 |
| 44. | Mar 31, 2012 | 0.98% | 3.13% | 0.07 | 5.71 | -0.65 |
| 45. | Apr 30, 2012 | 4.79% | -0.75% | 12.48 | 2.23 | -5.28 |
| 46. | May 31, 2012 | -5.72% | -6.27% | 48.58 | 49.12 | 48.85 |
| 47. | Jun 30, 2012 | 8.11% | 3.96% | 46.97 | 10.32 | 22.01 |
| 48. | Jul 31, 2012 | 3.72% | 1.26% | 6.06 | 0.27 | 1.27 |
| 49. | Aug 31, 2012 | 2.17% | 1.98% | 0.84 | 1.52 | 1.13 |
| 50. | Sep 30, 2012 | 4.78% | 2.42% | 12.42 | 2.82 | 5.92 |
| 51. | Oct 31, 2012 | 1.34% | -1.98% | 0.01 | 7.41 | -0.23 |
| 52. | Nov 30, 2012 | 4.67% | 0.28% | 11.64 | 0.21 | -1.57 |
| 53. | Dec 31, 2012 | -2.50% | 0.71% | 14.10 | 0.00 | 0.14 |
| 54. | Jan 31, 2013 | 2.33% | 5.04% | 1.16 | 18.48 | 4.64 |
| 55. | Feb 28, 2013 | 1.29% | 1.11% | 0.00 | 0.13 | 0.01 |
| 56. | Mar 31, 2013 | 5.12% | 3.60% | 14.95 | 8.15 | 11.04 |
| 57. | Apr 30, 2013 | -2.89% | 1.81% | 17.20 | 1.13 | -4.42 |
| 58. | May 31, 2013 | -3.22% | 2.08% | 20.06 | 1.78 | -5.97 |
| 59. | Jun 30, 2013 | -2.80% | -1.50% | 16.43 | 5.03 | 9.09 |
| 60. | Jul 31, 2013 | 9.03% | 4.95% | 60.46 | 17.66 | 32.68 |
| 61. | Aug 31, 2013 | -0.68% | -3.13% | 3.76 | 15.00 | 7.51 |
| 62. | Sep 30, 2013 | 3.59% | 2.97% | 5.44 | 4.98 | 5.20 |
| 63. | Oct 31, 2013 | 0.40% | 4.46% | 0.73 | 13.81 | -3.17 |
| 64. | Nov 30, 2013 | 0.06% | 2.80% | 1.42 | 4.25 | -2.46 |
| 65. | Dec 31, 2013 | 3.72% | 2.36% | 6.08 | 2.60 | 3.98 |
| 66. | Jan 31, 2014 | -9.34% | -3.56% | 112.27 | 18.51 | 45.58 |
| 67. | Feb 28, 2014 | 5.80% | 4.31% | 20.63 | 12.73 | 16.21 |
| 68. | Mar 31, 2014 | -0.89% | 0.69% | 4.60 | 0.00 | 0.11 |
| 69. | Apr 30, 2014 | -1.45% | 0.62% | 7.33 | 0.02 | 0.33 |
| 70. | May 31, 2014 | 4.89% | 2.10% | 13.26 | 1.85 | 4.95 |
| 71. | Jun 30, 2014 | -1.18% | 1.91% | 5.93 | 1.35 | -2.83 |
| Total (Σ): | 2,025.99 | 1,765.03 | 1,405.57 | |||
Show all
VarianceDEO = Σ(RDEO,t–RDEO)2 ÷ (71 – 1)
= 2,025.99 ÷ (71 – 1)
= 28.94
VarianceS&P 500 = Σ(RS&P 500,t–RS&P 500)2 ÷ (71 – 1)
= 1,765.03 ÷ (71 – 1)
= 25.21
CovarianceDEO, S&P 500 = Σ(RDEO,t–RDEO)×(RS&P 500,t–RS&P 500) ÷ (71 – 1)
= 1,405.57 ÷ (71 – 1)
= 20.08
Systematic Risk (β) Estimation
| VarianceDEO | 28.94 |
| VarianceS&P 500 | 25.21 |
| CovarianceDEO, S&P 500 | 20.08 |
| Correlation coefficientDEO, S&P 5001 | 0.74 |
| βDEO2 | 0.80 |
| αDEO3 | 0.66% |
Calculations
1 Correlation coefficientDEO, S&P 500
= CovarianceDEO, S&P 500 ÷ (Standard deviationDEO × Standard deviationS&P 500)
= 20.08 ÷ (5.38% × 5.02%)
= 0.74
2 βDEO
= CovarianceDEO, S&P 500 ÷ VarianceS&P 500
= 20.08 ÷ 25.21
= 0.80
3 αDEO
= AverageDEO – βDEO × AverageS&P 500
= 1.25% – 0.80 × 0.74%
= 0.66%
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 4.70% |
| Expected rate of return on market portfolio2 | E(RM) | 13.52% |
| Systematic risk (β) of Diageo PLC common stock | βDEO | 0.80 |
| Expected rate of return on Diageo PLC common stock3 | E(RDEO) | 11.72% |
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(RDEO) = RF + βDEO [E(RM) – RF]
= 4.70% + 0.80 [13.52% – 4.70%]
= 11.72%