Capital Asset Pricing Model (CAPM)

Difficulty: Intermediate


Rates of Return

Cisco Systems Inc., monthly rates of return

 
Cisco Systems Inc. (CSCO) Standard & Poor's 500 (S&P 500)
t Date PriceCSCO,t1 DividendCSCO,t1 RCSCO,t2 PriceS&P 500,t RS&P 500,t3
Aug 31, 2011 15.67 1,218.89
1. Sep 30, 2011 15.50 -1.08% 1,131.42 -7.18%
2. Oct 31, 2011 18.53 0.06 19.94% 1,253.30 10.77%
3. Nov 30, 2011 18.64 0.59% 1,246.96 -0.51%
. . . . . . .
. . . . . . .
. . . . . . .
70. Jun 30, 2017 31.30 -0.73% 2,423.41 0.48%
71. Jul 31, 2017 31.45 0.29 1.41% 2,470.30 1.93%
Average: 1.46% 1.05%
Standard Deviation: 6.84% 3.16%
Cisco Systems Inc. (CSCO) Standard & Poor's 500 (S&P 500)
t Date PriceCSCO,t1 DividendCSCO,t1 RCSCO,t2 PriceS&P 500,t RS&P 500,t3
Aug 31, 2011 15.67 1,218.89
1. Sep 30, 2011 15.50 -1.08% 1,131.42 -7.18%
2. Oct 31, 2011 18.53 0.06 19.94% 1,253.30 10.77%
3. Nov 30, 2011 18.64 0.59% 1,246.96 -0.51%
4. Dec 31, 2011 18.08 -3.00% 1,257.60 0.85%
5. Jan 31, 2012 19.65 0.06 9.02% 1,312.41 4.36%
6. Feb 29, 2012 19.88 1.17% 1,365.68 4.06%
7. Mar 31, 2012 21.15 6.39% 1,408.47 3.13%
8. Apr 30, 2012 20.16 0.08 -4.30% 1,397.91 -0.75%
9. May 31, 2012 16.33 -19.00% 1,310.33 -6.27%
10. Jun 30, 2012 17.17 5.14% 1,362.16 3.96%
11. Jul 31, 2012 15.95 0.08 -6.64% 1,379.32 1.26%
12. Aug 31, 2012 19.08 19.62% 1,406.58 1.98%
13. Sep 30, 2012 19.10 0.10% 1,440.67 2.42%
14. Oct 31, 2012 17.15 0.14 -9.48% 1,412.16 -1.98%
15. Nov 30, 2012 18.91 0.14 11.08% 1,416.18 0.28%
16. Dec 31, 2012 19.65 3.91% 1,426.19 0.71%
17. Jan 31, 2013 20.57 4.68% 1,498.11 5.04%
18. Feb 28, 2013 20.86 1.41% 1,514.68 1.11%
19. Mar 31, 2013 20.90 0.19% 1,569.19 3.60%
20. Apr 30, 2013 20.92 0.17 0.91% 1,597.57 1.81%
21. May 31, 2013 24.12 15.30% 1,630.74 2.08%
22. Jun 30, 2013 24.34 0.91% 1,606.28 -1.50%
23. Jul 31, 2013 25.59 0.17 5.83% 1,685.73 4.95%
24. Aug 31, 2013 23.31 -8.91% 1,632.97 -3.13%
25. Sep 30, 2013 23.43 0.51% 1,681.55 2.97%
26. Oct 31, 2013 22.56 0.17 -2.99% 1,756.54 4.46%
27. Nov 30, 2013 21.25 -5.81% 1,805.81 2.80%
28. Dec 31, 2013 22.43 5.55% 1,848.36 2.36%
29. Jan 31, 2014 21.91 0.17 -1.56% 1,782.59 -3.56%
30. Feb 28, 2014 21.80 -0.50% 1,859.45 4.31%
31. Mar 31, 2014 22.42 2.84% 1,872.34 0.69%
32. Apr 30, 2014 23.11 0.19 3.93% 1,883.95 0.62%
33. May 31, 2014 24.62 6.53% 1,923.57 2.10%
34. Jun 30, 2014 24.85 0.93% 1,960.23 1.91%
35. Jul 31, 2014 25.23 0.19 2.29% 1,930.67 -1.51%
36. Aug 31, 2014 24.99 -0.95% 2,003.37 3.77%
37. Sep 30, 2014 25.17 0.19 1.48% 1,972.29 -1.55%
38. Oct 31, 2014 24.47 -2.78% 2,018.05 2.32%
39. Nov 30, 2014 27.64 12.95% 2,067.56 2.45%
40. Dec 31, 2014 27.82 0.65% 2,058.90 -0.42%
41. Jan 31, 2015 26.37 0.19 -4.53% 1,994.99 -3.10%
42. Feb 28, 2015 29.51 11.91% 2,104.50 5.49%
43. Mar 31, 2015 27.53 0.21 -6.00% 2,067.89 -1.74%
44. Apr 30, 2015 28.83 4.72% 2,085.51 0.85%
45. May 31, 2015 29.31 1.66% 2,107.39 1.05%
46. Jun 30, 2015 27.46 -6.31% 2,063.11 -2.10%
47. Jul 31, 2015 28.42 0.21 4.26% 2,103.84 1.97%
48. Aug 31, 2015 25.88 -8.94% 1,972.18 -6.26%
49. Sep 30, 2015 26.25 1.43% 1,920.03 -2.64%
50. Oct 31, 2015 28.85 0.21 10.70% 2,079.36 8.30%
51. Nov 30, 2015 27.25 -5.55% 2,080.41 0.05%
52. Dec 31, 2015 27.16 -0.33% 2,043.94 -1.75%
53. Jan 31, 2016 23.79 0.21 -11.63% 1,940.24 -5.07%
54. Feb 29, 2016 26.18 10.05% 1,932.23 -0.41%
55. Mar 31, 2016 28.47 8.75% 2,059.74 6.60%
56. Apr 30, 2016 27.49 0.26 -2.53% 2,065.30 0.27%
57. May 31, 2016 29.05 5.67% 2,096.95 1.53%
58. Jun 30, 2016 28.69 -1.24% 2,098.86 0.09%
59. Jul 31, 2016 30.53 0.26 7.32% 2,173.60 3.56%
60. Aug 31, 2016 31.44 2.98% 2,170.95 -0.12%
61. Sep 30, 2016 31.72 0.89% 2,168.27 -0.12%
62. Oct 31, 2016 30.68 0.26 -2.46% 2,126.15 -1.94%
63. Nov 30, 2016 29.82 -2.80% 2,198.81 3.42%
64. Dec 31, 2016 30.22 1.34% 2,238.83 1.82%
65. Jan 31, 2017 30.72 0.26 2.51% 2,278.87 1.79%
66. Feb 28, 2017 34.18 11.26% 2,363.64 3.72%
67. Mar 31, 2017 33.80 -1.11% 2,362.72 -0.04%
68. Apr 30, 2017 34.07 0.29 1.66% 2,384.20 0.91%
69. May 31, 2017 31.53 -7.46% 2,411.80 1.16%
70. Jun 30, 2017 31.30 -0.73% 2,423.41 0.48%
71. Jul 31, 2017 31.45 0.29 1.41% 2,470.30 1.93%
Average: 1.46% 1.05%
Standard Deviation: 6.84% 3.16%

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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 CSCO 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

 
VarianceCSCO 46.85
VarianceS&P 500 10.02
CovarianceCSCO, S&P 500 13.65
Correlation CoefficientCSCO, S&P 5001 0.63
βCSCO2 1.36
αCSCO3 0.03

Calculations

1 CovarianceCSCO, S&P 500 ÷ (Standard DeviationCSCO × Standard DeviationS&P 500)
= 13.65 ÷ (6.84 × 3.16)

2 CovarianceCSCO, S&P 500 ÷ VarianceS&P 500
= 13.65 ÷ 10.02

3 AverageCSCO – βCSCO × AverageS&P 500
= 1.46 – 1.36 × 1.05

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Expected Rate of Return

 
Assumptions
Rate of return on LT Treasury Composite1 RF 3.00%
Expected rate of return on market portfolio2 E(RM) 12.43%
Systematic risk (β) of Cisco's common stock βCSCO 1.36
Expected rate of return on Cisco's common stock3 E(RCSCO) 15.85%

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(RCSCO) = RF + βCSCO [E(RM) – RF]
= 3.00% + 1.36 [12.43% – 3.00%]
= 15.85%

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