Kraft Foods Group Inc. (NASDAQ:KRFT)

Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like Kraft Foods Group Inc. common stock.

Rates of Return
Variance and Covariance
Systematic Risk (β) Estimation
Expected Rate of Return

Kraft Foods Group Inc., monthly rates of return

		Kraft Foods Group Inc. (KRFT)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_KRFT,t¹	Dividend_KRFT,t¹	R_KRFT,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Sep 30, 2012	$44.63			1,440.67
1.	Oct 31, 2012	$45.46		1.86%	1,412.16	-1.98%
2.	Nov 30, 2012	$45.24		-0.48%	1,416.18	0.28%
3.	Dec 31, 2012	$45.47	$0.50	1.61%	1,426.19	0.71%
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26.	Nov 30, 2014	$60.17		6.78%	2,067.56	2.45%
27.	Dec 31, 2014	$62.66	$0.55	5.05%	2,058.90	-0.42%
Average (R):				1.69%		1.36%
Standard deviation:				4.49%		2.41%

		Kraft Foods Group Inc. (KRFT)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_KRFT,t¹	Dividend_KRFT,t¹	R_KRFT,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Sep 30, 2012	$44.63			1,440.67
1.	Oct 31, 2012	$45.46		1.86%	1,412.16	-1.98%
2.	Nov 30, 2012	$45.24		-0.48%	1,416.18	0.28%
3.	Dec 31, 2012	$45.47	$0.50	1.61%	1,426.19	0.71%
4.	Jan 31, 2013	$46.22		1.65%	1,498.11	5.04%
5.	Feb 28, 2013	$48.48		4.89%	1,514.68	1.11%
6.	Mar 31, 2013	$51.53	$0.50	7.32%	1,569.19	3.60%
7.	Apr 30, 2013	$51.49		-0.08%	1,597.57	1.81%
8.	May 31, 2013	$55.13		7.07%	1,630.74	2.08%
9.	Jun 30, 2013	$55.87	$0.50	2.25%	1,606.28	-1.50%
10.	Jul 31, 2013	$56.58		1.27%	1,685.73	4.95%
11.	Aug 31, 2013	$51.77		-8.50%	1,632.97	-3.13%
12.	Sep 30, 2013	$52.48		1.37%	1,681.55	2.97%
13.	Oct 31, 2013	$54.38	$0.525	4.62%	1,756.54	4.46%
14.	Nov 30, 2013	$53.12		-2.32%	1,805.81	2.80%
15.	Dec 31, 2013	$53.91	$0.525	2.48%	1,848.36	2.36%
16.	Jan 31, 2014	$52.35		-2.89%	1,782.59	-3.56%
17.	Feb 28, 2014	$55.27		5.58%	1,859.45	4.31%
18.	Mar 31, 2014	$56.10		1.50%	1,872.34	0.69%
19.	Apr 30, 2014	$56.86	$0.525	2.29%	1,883.95	0.62%
20.	May 31, 2014	$59.46		4.57%	1,923.57	2.10%
21.	Jun 30, 2014	$59.95		0.82%	1,960.23	1.91%
22.	Jul 31, 2014	$53.59	$0.525	-9.73%	1,930.67	-1.51%
23.	Aug 31, 2014	$58.90		9.91%	2,003.37	3.77%
24.	Sep 30, 2014	$56.40		-4.24%	1,972.29	-1.55%
25.	Oct 31, 2014	$56.35	$0.55	0.89%	2,018.05	2.32%
26.	Nov 30, 2014	$60.17		6.78%	2,067.56	2.45%
27.	Dec 31, 2014	$62.66	$0.55	5.05%	2,058.90	-0.42%
Average (R):				1.69%		1.36%
Standard deviation:				4.49%		2.41%

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 KRFT during period t

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

Kraft Foods Group Inc., calculation of variance and covariance of returns

t	Date	R_KRFT,t	R_{S&P 500,t}	(R_KRFT,t–R_KRFT)²	(R_{S&P 500,t}–R_{S&P 500})²	(R_KRFT,t–R_KRFT)×(R_{S&P 500,t}–R_{S&P 500})
1.	Oct 31, 2012	1.86%	-1.98%	0.03	11.14	-0.58
2.	Nov 30, 2012	-0.48%	0.28%	4.71	1.15	2.33
3.	Dec 31, 2012	1.61%	0.71%	0.01	0.43	0.05
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26.	Nov 30, 2014	6.78%	2.45%	25.93	1.20	5.57
27.	Dec 31, 2014	5.05%	-0.42%	11.33	3.16	-5.98
Total (Σ):				525.18	151.09	166.74

t	Date	R_KRFT,t	R_{S&P 500,t}	(R_KRFT,t–R_KRFT)²	(R_{S&P 500,t}–R_{S&P 500})²	(R_KRFT,t–R_KRFT)×(R_{S&P 500,t}–R_{S&P 500})
1.	Oct 31, 2012	1.86%	-1.98%	0.03	11.14	-0.58
2.	Nov 30, 2012	-0.48%	0.28%	4.71	1.15	2.33
3.	Dec 31, 2012	1.61%	0.71%	0.01	0.43	0.05
4.	Jan 31, 2013	1.65%	5.04%	0.00	13.57	-0.14
5.	Feb 28, 2013	4.89%	1.11%	10.26	0.06	-0.81
6.	Mar 31, 2013	7.32%	3.60%	31.77	5.02	12.62
7.	Apr 30, 2013	-0.08%	1.81%	3.11	0.20	-0.79
8.	May 31, 2013	7.07%	2.08%	28.98	0.51	3.86
9.	Jun 30, 2013	2.25%	-1.50%	0.32	8.17	-1.61
10.	Jul 31, 2013	1.27%	4.95%	0.17	12.87	-1.49
11.	Aug 31, 2013	-8.50%	-3.13%	103.79	20.15	45.73
12.	Sep 30, 2013	1.37%	2.97%	0.10	2.61	-0.51
13.	Oct 31, 2013	4.62%	4.46%	8.61	9.61	9.10
14.	Nov 30, 2013	-2.32%	2.80%	16.03	2.09	-5.79
15.	Dec 31, 2013	2.48%	2.36%	0.62	0.99	0.79
16.	Jan 31, 2014	-2.89%	-3.56%	20.98	24.18	22.52
17.	Feb 28, 2014	5.58%	4.31%	15.14	8.72	11.49
18.	Mar 31, 2014	1.50%	0.69%	0.03	0.44	0.12
19.	Apr 30, 2014	2.29%	0.62%	0.36	0.55	-0.45
20.	May 31, 2014	4.57%	2.10%	8.33	0.55	2.15
21.	Jun 30, 2014	0.82%	1.91%	0.74	0.30	-0.47
22.	Jul 31, 2014	-9.73%	-1.51%	130.41	8.22	32.74
23.	Aug 31, 2014	9.91%	3.77%	67.60	5.79	19.79
24.	Sep 30, 2014	-4.24%	-1.55%	35.18	8.47	17.26
25.	Oct 31, 2014	0.89%	2.32%	0.64	0.92	-0.77
26.	Nov 30, 2014	6.78%	2.45%	25.93	1.20	5.57
27.	Dec 31, 2014	5.05%	-0.42%	11.33	3.16	-5.98
Total (Σ):				525.18	151.09	166.74

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Variance_KRFT = Σ(R_KRFT,t–R_KRFT)² ÷ (27 – 1)
= 525.18 ÷ (27 – 1)
= 20.20

Variance_{S&P 500} = Σ(R_{S&P 500,t}–R_{S&P 500})² ÷ (27 – 1)
= 151.09 ÷ (27 – 1)
= 5.81

Covariance_{KRFT, S&P 500} = Σ(R_KRFT,t–R_KRFT)×(R_{S&P 500,t}–R_{S&P 500}) ÷ (27 – 1)
= 166.74 ÷ (27 – 1)
= 6.41

Variance_KRFT	20.20
Variance_{S&P 500}	5.81
Covariance_{KRFT, S&P 500}	6.41
Correlation coefficient_{KRFT, S&P 500}¹	0.59
β_KRFT²	1.10
α_KRFT³	0.19%

Calculations

¹ Correlation coefficient_{KRFT, S&P 500}
= Covariance_{KRFT, S&P 500} ÷ (Standard deviation_KRFT × Standard deviation_{S&P 500})
= 6.41 ÷ (4.49% × 2.41%)
= 0.59

² β_KRFT
= Covariance_{KRFT, S&P 500} ÷ Variance_{S&P 500}
= 6.41 ÷ 5.81
= 1.10

³ α_KRFT
= Average_KRFT – β_KRFT × Average_{S&P 500}
= 1.69% – 1.10 × 1.36%
= 0.19%

Assumptions
Rate of return on LT Treasury Composite¹	R_F	4.60%
Expected rate of return on market portfolio²	E(R_M)	14.88%
Systematic risk (β) of Kraft Foods Group Inc. common stock	β_KRFT	1.10

Expected rate of return on Kraft Foods Group Inc. common stock³	E(R_KRFT)	15.95%

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).

² See details »

³ E(R_KRFT) = R_F + β_KRFT [E(R_M) – R_F]
= 4.60% + 1.10 [14.88% – 4.60%]
= 15.95%

Kraft Foods Group Inc. (NASDAQ:KRFT)

Capital Asset Pricing Model (CAPM)

Rates of Return

Variance and Covariance

Systematic Risk (β) Estimation

Expected Rate of Return