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Verizon Communications Inc. (VZ) | 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

Verizon Communications Inc., monthly rates of return

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    Verizon Communications Inc. (VZ) NYSE Composite Index (NYC)
t Date PriceVZ,t1 DividendVZ,t1 RVZ,t2 PriceNYC,t RNYC,t3
  Jan 31, 2008 38.83     9,126.16  
1. Feb 29, 2008 36.32   -6.46% 8,962.46 -1.79%
2. Mar 31, 2008 36.45   0.36% 8,797.29 -1.84%
3. Apr 30, 2008 38.48 0.43 6.75% 9,299.60 5.71%
. . . . . . .
. . . . . . .
. . . . . . .
58. Nov 30, 2012 44.12   -1.16% 8,260.43 0.47%
59. Dec 31, 2012 43.27   -1.93% 8,443.51 2.22%
Average: 0.76%   0.05%
Standard Deviation: 5.07%   6.05%
    Verizon Communications Inc. (VZ) NYSE Composite Index (NYC)
t Date PriceVZ,t1 DividendVZ,t1 RVZ,t2 PriceNYC,t RNYC,t3
  Jan 31, 2008 38.83     9,126.16  
1. Feb 29, 2008 36.32   -6.46% 8,962.46 -1.79%
2. Mar 31, 2008 36.45   0.36% 8,797.29 -1.84%
3. Apr 30, 2008 38.48 0.43 6.75% 9,299.60 5.71%
4. May 31, 2008 38.47   -0.03% 9,401.08 1.09%
5. Jun 30, 2008 35.40   -7.98% 8,660.48 -7.88%
6. Jul 31, 2008 34.04 0.43 -2.63% 8,438.64 -2.56%
7. Aug 31, 2008 35.12   3.17% 8,382.08 -0.67%
8. Sep 30, 2008 32.09   -8.63% 7,532.80 -10.13%
9. Oct 31, 2008 29.67 0.46 -6.11% 6,061.09 -19.54%
10. Nov 30, 2008 32.65   10.04% 5,599.30 -7.62%
11. Dec 31, 2008 33.90   3.83% 5,757.05 2.82%
12. Jan 31, 2009 29.87 0.46 -10.53% 5,195.79 -9.75%
13. Feb 28, 2009 28.53   -4.49% 4,617.03 -11.14%
14. Mar 31, 2009 30.20   5.85% 4,978.98 7.84%
15. Apr 30, 2009 30.34 0.46 1.99% 5,513.36 10.73%
16. May 31, 2009 29.26   -3.56% 6,004.07 8.90%
17. Jun 30, 2009 30.73   5.02% 5,905.15 -1.65%
18. Jul 31, 2009 32.07 0.46 5.86% 6,424.28 8.79%
19. Aug 31, 2009 31.04   -3.21% 6,643.24 3.41%
20. Sep 30, 2009 30.27   -2.48% 6,910.88 4.03%
21. Oct 31, 2009 29.59 0.475 -0.68% 6,739.45 -2.48%
22. Nov 30, 2009 31.46   6.32% 7,092.36 5.24%
23. Dec 31, 2009 33.13   5.31% 7,184.96 1.31%
24. Jan 31, 2010 29.42 0.475 -9.76% 6,883.78 -4.19%
25. Feb 28, 2010 28.93   -1.67% 7,035.04 2.20%
26. Mar 31, 2010 31.02   7.22% 7,447.80 5.87%
27. Apr 30, 2010 28.90 0.475 -5.30% 7,474.40 0.36%
28. May 31, 2010 27.52   -4.78% 6,791.57 -9.14%
29. Jun 30, 2010 28.02   1.82% 6,469.65 -4.74%
30. Jul 31, 2010 29.06 0.475 5.41% 6,998.99 8.18%
31. Aug 31, 2010 29.53   1.62% 6,704.15 -4.21%
32. Sep 30, 2010 32.59   10.36% 7,281.07 8.61%
33. Oct 31, 2010 32.48 0.4875 1.16% 7,513.35 3.19%
34. Nov 30, 2010 32.01   -1.45% 7,430.94 -1.10%
35. Dec 31, 2010 35.78   11.78% 7,964.02 7.17%
36. Jan 31, 2011 35.62 0.4875 0.92% 8,139.16 2.20%
37. Feb 28, 2011 36.92   3.65% 8,438.55 3.68%
38. Mar 31, 2011 38.54   4.39% 8,404.98 -0.40%
39. Apr 30, 2011 37.78 0.4875 -0.71% 8,671.41 3.17%
40. May 31, 2011 36.93   -2.25% 8,477.28 -2.24%
41. Jun 30, 2011 37.23   0.81% 8,319.10 -1.87%
42. Jul 31, 2011 35.29 0.4875 -3.90% 8,079.44 -2.88%
43. Aug 31, 2011 36.17   2.49% 7,528.39 -6.82%
44. Sep 30, 2011 36.80   1.74% 6,791.65 -9.79%
45. Oct 31, 2011 36.98 0.50 1.85% 7,563.38 11.36%
46. Nov 30, 2011 37.73   2.03% 7,484.50 -1.04%
47. Dec 31, 2011 40.12   6.33% 7,477.03 -0.10%
48. Jan 31, 2012 37.66 0.50 -4.89% 7,838.48 4.83%
49. Feb 29, 2012 38.11   1.19% 8,113.24 3.51%
50. Mar 31, 2012 38.23   0.31% 8,206.93 1.15%
51. Apr 30, 2012 40.38 0.50 6.93% 8,119.06 -1.07%
52. May 31, 2012 41.64   3.12% 7,463.96 -8.07%
53. Jun 30, 2012 44.44   6.72% 7,801.84 4.53%
54. Jul 31, 2012 45.14 0.50 2.70% 7,863.93 0.80%
55. Aug 31, 2012 42.94   -4.87% 8,014.93 1.92%
56. Sep 30, 2012 45.57   6.12% 8,251.00 2.95%
57. Oct 31, 2012 44.64 0.515 -0.91% 8,221.40 -0.36%
58. Nov 30, 2012 44.12   -1.16% 8,260.43 0.47%
59. Dec 31, 2012 43.27   -1.93% 8,443.51 2.22%
Average: 0.76%   0.05%
Standard Deviation: 5.07%   6.05%

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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 VZ 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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VarianceVZ 25.66
VarianceNYC 36.59
CovarianceVZ,NYC 14.35
Correlation CoefficientVZ,NYC1 0.47
βVZ2 0.39
αVZ3 0.74

Calculations

1 CovarianceVZ,NYC ÷ (Standard DeviationVZ × Standard DeviationNYC)
= 14.35 ÷ (5.07 × 6.05)

2 CovarianceVZ,NYC ÷ VarianceNYC
= 14.35 ÷ 36.59

3 AverageVZ – βVZ × AverageNYC
= 0.76 – 0.39 × 0.05

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Expected Rate of Return

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.80%
Expected rate of return on market portfolio2 E(RM) 13.12%
Systematic risk (β) of 's common stock βVZ 0.39
 
Expected rate of return on 's common stock3 E(RVZ) 6.85%

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(RVZ) = RF + βVZ [E(RM) – RF]
= 2.80% + 0.39 [13.12% – 2.80%]
= 6.85%

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