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Capital Asset Pricing Model (CAPM)

Difficulty: Intermediate

Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like ADP's common stock.


Rates of Return

Automatic Data Processing Inc., monthly rates of return

 
Automatic Data Processing Inc. (ADP) Standard & Poor's 500 (S&P 500)
t Date PriceADP,t1 DividendADP,t1 RADP,t2 PriceS&P 500,t RS&P 500,t3
Jul 31, 2011
1. Aug 31, 2011 % %
2. Sep 30, 2011 % %
3. Oct 31, 2011 % %
. . . . . . .
. . . . . . .
. . . . . . .
70. May 31, 2017 % %
71. Jun 30, 2017 % %
Average: % %
Standard Deviation: % %
Automatic Data Processing Inc. (ADP) Standard & Poor's 500 (S&P 500)
t Date PriceADP,t1 DividendADP,t1 RADP,t2 PriceS&P 500,t RS&P 500,t3
Jul 31, 2011
1. Aug 31, 2011 % %
2. Sep 30, 2011 % %
3. Oct 31, 2011 % %
4. Nov 30, 2011 % %
5. Dec 31, 2011 % %
6. Jan 31, 2012 % %
7. Feb 29, 2012 % %
8. Mar 31, 2012 % %
9. Apr 30, 2012 % %
10. May 31, 2012 % %
11. Jun 30, 2012 % %
12. Jul 31, 2012 % %
13. Aug 31, 2012 % %
14. Sep 30, 2012 % %
15. Oct 31, 2012 % %
16. Nov 30, 2012 % %
17. Dec 31, 2012 % %
18. Jan 31, 2013 % %
19. Feb 28, 2013 % %
20. Mar 31, 2013 % %
21. Apr 30, 2013 % %
22. May 31, 2013 % %
23. Jun 30, 2013 % %
24. Jul 31, 2013 % %
25. Aug 31, 2013 % %
26. Sep 30, 2013 % %
27. Oct 31, 2013 % %
28. Nov 30, 2013 % %
29. Dec 31, 2013 % %
30. Jan 31, 2014 % %
31. Feb 28, 2014 % %
32. Mar 31, 2014 % %
33. Apr 30, 2014 % %
34. May 31, 2014 % %
35. Jun 30, 2014 % %
36. Jul 31, 2014 % %
37. Aug 31, 2014 % %
38. Sep 30, 2014 % %
39. Oct 31, 2014 % %
40. Nov 30, 2014 % %
41. Dec 31, 2014 % %
42. Jan 31, 2015 % %
43. Feb 28, 2015 % %
44. Mar 31, 2015 % %
45. Apr 30, 2015 % %
46. May 31, 2015 % %
47. Jun 30, 2015 % %
48. Jul 31, 2015 % %
49. Aug 31, 2015 % %
50. Sep 30, 2015 % %
51. Oct 31, 2015 % %
52. Nov 30, 2015 % %
53. Dec 31, 2015 % %
54. Jan 31, 2016 % %
55. Feb 29, 2016 % %
56. Mar 31, 2016 % %
57. Apr 30, 2016 % %
58. May 31, 2016 % %
59. Jun 30, 2016 % %
60. Jul 31, 2016 % %
61. Aug 31, 2016 % %
62. Sep 30, 2016 % %
63. Oct 31, 2016 % %
64. Nov 30, 2016 % %
65. Dec 31, 2016 % %
66. Jan 31, 2017 % %
67. Feb 28, 2017 % %
68. Mar 31, 2017 % %
69. Apr 30, 2017 % %
70. May 31, 2017 % %
71. Jun 30, 2017 % %
Average: % %
Standard Deviation: % %

Show All

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

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

3 Rate of return on S&P 500 (the market portfolio proxy) during period t

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Systematic Risk (β) Estimation

 
VarianceADP
VarianceS&P 500
CovarianceADP, S&P 500
Correlation CoefficientADP, S&P 5001
βADP2
αADP3

Calculations

1 CovarianceADP, S&P 500 ÷ (Standard DeviationADP × Standard DeviationS&P 500)
= ÷ ( × )

2 CovarianceADP, S&P 500 ÷ VarianceS&P 500
= ÷

3 AverageADP – βADP × AverageS&P 500
= ×

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Expected Rate of Return

 
Assumptions
Rate of return on LT Treasury Composite1 RF %
Expected rate of return on market portfolio2 E(RM) %
Systematic risk (β) of ADP's common stock βADP
Expected rate of return on ADP's common stock3 E(RADP) %

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(RADP) = RF + βADP [E(RM) – RF]
= % + [% – %]
= %

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