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Lowe's Cos. Inc. (LOW) | 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 's common stock.

Rates of Return

Lowe's Cos. Inc., monthly rates of return

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    Lowe's Cos. Inc. (LOW) NYSE Composite Index (NYC)
t Date PriceLOW,t1 DividendLOW,t1 RLOW,t2 PriceNYC,t RNYC,t3
  Feb 28, 2007 32.55     9,124.54  
1. Mar 31, 2007 31.49   -3.26% 9,261.82 1.50%
2. Apr 30, 2007 30.56 0.05 -2.79% 9,627.73 3.95%
3. May 31, 2007 32.82   7.40% 9,978.64 3.64%
. . . . . . .
. . . . . . .
. . . . . . .
70. Dec 31, 2012 35.52   -1.58% 8,443.51 2.22%
71. Jan 31, 2013 38.19 0.16 7.97% 8,894.71 5.34%
Average: 0.78%   0.13%
Standard Deviation: 9.18%   5.71%
    Lowe's Cos. Inc. (LOW) NYSE Composite Index (NYC)
t Date PriceLOW,t1 DividendLOW,t1 RLOW,t2 PriceNYC,t RNYC,t3
  Feb 28, 2007 32.55     9,124.54  
1. Mar 31, 2007 31.49   -3.26% 9,261.82 1.50%
2. Apr 30, 2007 30.56 0.05 -2.79% 9,627.73 3.95%
3. May 31, 2007 32.82   7.40% 9,978.64 3.64%
4. Jun 30, 2007 30.69   -6.49% 9,873.02 -1.06%
5. Jul 31, 2007 28.01 0.08 -8.47% 9,554.50 -3.23%
6. Aug 31, 2007 31.06   10.89% 9,596.98 0.44%
7. Sep 30, 2007 28.02   -9.79% 10,039.30 4.61%
8. Oct 31, 2007 26.89 0.08 -3.75% 10,311.60 2.71%
9. Nov 30, 2007 24.41   -9.22% 9,856.85 -4.41%
10. Dec 31, 2007 22.62   -7.33% 9,740.32 -1.18%
11. Jan 31, 2008 26.43 0.08 17.20% 9,126.16 -6.31%
12. Feb 29, 2008 23.97   -9.31% 8,962.46 -1.79%
13. Mar 31, 2008 22.94   -4.30% 8,797.29 -1.84%
14. Apr 30, 2008 25.19 0.08 10.16% 9,299.60 5.71%
15. May 31, 2008 24.00   -4.72% 9,401.08 1.09%
16. Jun 30, 2008 20.75   -13.54% 8,660.48 -7.88%
17. Jul 31, 2008 20.32 0.085 -1.66% 8,438.64 -2.56%
18. Aug 31, 2008 24.64   21.26% 8,382.08 -0.67%
19. Sep 30, 2008 23.69   -3.86% 7,532.80 -10.13%
20. Oct 31, 2008 21.70 0.085 -8.04% 6,061.09 -19.54%
21. Nov 30, 2008 20.66   -4.79% 5,599.30 -7.62%
22. Dec 31, 2008 21.52   4.16% 5,757.05 2.82%
23. Jan 31, 2009 18.27 0.085 -14.71% 5,195.79 -9.75%
24. Feb 28, 2009 15.84   -13.30% 4,617.03 -11.14%
25. Mar 31, 2009 18.25   15.21% 4,978.98 7.84%
26. Apr 30, 2009 21.50 0.085 18.27% 5,513.36 10.73%
27. May 31, 2009 19.01   -11.58% 6,004.07 8.90%
28. Jun 30, 2009 19.41   2.10% 5,905.15 -1.65%
29. Jul 31, 2009 22.46 0.09 16.18% 6,424.28 8.79%
30. Aug 31, 2009 21.50   -4.27% 6,643.24 3.41%
31. Sep 30, 2009 20.94   -2.60% 6,910.88 4.03%
32. Oct 31, 2009 19.57 0.09 -6.11% 6,739.45 -2.48%
33. Nov 30, 2009 21.81   11.45% 7,092.36 5.24%
34. Dec 31, 2009 23.39   7.24% 7,184.96 1.31%
35. Jan 31, 2010 21.65 0.09 -7.05% 6,883.78 -4.19%
36. Feb 28, 2010 23.71   9.52% 7,035.04 2.20%
37. Mar 31, 2010 24.24   2.24% 7,447.80 5.87%
38. Apr 30, 2010 27.12 0.09 12.25% 7,474.40 0.36%
39. May 31, 2010 24.75   -8.74% 6,791.57 -9.14%
40. Jun 30, 2010 20.42   -17.49% 6,469.65 -4.74%
41. Jul 31, 2010 20.74 0.11 2.11% 6,998.99 8.18%
42. Aug 31, 2010 20.28   -2.22% 6,704.15 -4.21%
43. Sep 30, 2010 22.29   9.91% 7,281.07 8.61%
44. Oct 31, 2010 21.34 0.11 -3.77% 7,513.35 3.19%
45. Nov 30, 2010 22.70   6.37% 7,430.94 -1.10%
46. Dec 31, 2010 25.08   10.48% 7,964.02 7.17%
47. Jan 31, 2011 24.80 0.11 -0.68% 8,139.16 2.20%
48. Feb 28, 2011 26.17   5.52% 8,438.55 3.68%
49. Mar 31, 2011 26.43   0.99% 8,404.98 -0.40%
50. Apr 30, 2011 26.25 0.11 -0.26% 8,671.41 3.17%
51. May 31, 2011 24.14   -8.04% 8,477.28 -2.24%
52. Jun 30, 2011 23.31   -3.44% 8,319.10 -1.87%
53. Jul 31, 2011 21.58 0.14 -6.82% 8,079.44 -2.88%
54. Aug 31, 2011 19.93   -7.65% 7,528.39 -6.82%
55. Sep 30, 2011 19.34   -2.96% 6,791.65 -9.79%
56. Oct 31, 2011 21.02 0.14 9.41% 7,563.38 11.36%
57. Nov 30, 2011 24.01   14.22% 7,484.50 -1.04%
58. Dec 31, 2011 25.38   5.71% 7,477.03 -0.10%
59. Jan 31, 2012 26.83 0.14 6.26% 7,838.48 4.83%
60. Feb 29, 2012 28.38   5.78% 8,113.24 3.51%
61. Mar 31, 2012 31.38   10.57% 8,206.93 1.15%
62. Apr 30, 2012 31.47 0.14 0.73% 8,119.06 -1.07%
63. May 31, 2012 26.72   -15.09% 7,463.96 -8.07%
64. Jun 30, 2012 28.44   6.44% 7,801.84 4.53%
65. Jul 31, 2012 25.37 0.16 -10.23% 7,863.93 0.80%
66. Aug 31, 2012 28.48   12.26% 8,014.93 1.92%
67. Sep 30, 2012 30.24   6.18% 8,251.00 2.95%
68. Oct 31, 2012 32.38 0.16 7.61% 8,221.40 -0.36%
69. Nov 30, 2012 36.09   11.46% 8,260.43 0.47%
70. Dec 31, 2012 35.52   -1.58% 8,443.51 2.22%
71. Jan 31, 2013 38.19 0.16 7.97% 8,894.71 5.34%
Average: 0.78%   0.13%
Standard Deviation: 9.18%   5.71%

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1 Data in USD $ per share of common stock, adjusted for splits and stock dividends.

2 Rate of return on common stock of LOW during period t

3 Rate of return on NYC (the market portfolio proxy) during period t

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Systematic Risk (β) Estimation

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VarianceLOW 84.26
VarianceNYC 32.60
CovarianceLOW,NYC 28.15
Correlation CoefficientLOW,NYC1 0.54
βLOW2 0.86
αLOW3 0.67

Calculations

1 CovarianceLOW,NYC ÷ (Standard DeviationLOW × Standard DeviationNYC)
= 28.15 ÷ (9.18 × 5.71)

2 CovarianceLOW,NYC ÷ VarianceNYC
= 28.15 ÷ 32.60

3 AverageLOW – βLOW × AverageNYC
= 0.78 – 0.86 × 0.13

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Expected Rate of Return

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.78%
Expected rate of return on market portfolio2 E(RM) 13.09%
Systematic risk (β) of 's common stock βLOW 0.86
 
Expected rate of return on 's common stock3 E(RLOW) 11.68%

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).

Calculations

2 See Details »

3 E(RLOW) = RF + βLOW [E(RM) – RF]
= 2.78% + 0.86 [13.09% – 2.78%]
= 11.68%

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