AbbVie Inc. (ABBV)

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 AbbVie Inc.’s common stock.

Rates of Return
Systematic Risk (β) Estimation
Expected Rate of Return

Rates of Return

AbbVie Inc., monthly rates of return

		AbbVie Inc. (ABBV)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_ABBV,t¹	Dividend_ABBV,t¹	R_ABBV,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Jan 31, 2014	49.23			1,782.59
1.	Feb 28, 2014	50.91		3.41%	1,859.45	4.31%
2.	Mar 31, 2014	51.40		0.96%	1,872.34	0.69%
3.	Apr 30, 2014	52.08	0.42	2.14%	1,883.95	0.62%
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58.	Nov 30, 2018	94.27		21.09%	2,760.17	1.79%
59.	Dec 31, 2018	92.19		-2.21%	2,506.85	-9.18%
Average:				1.63%		0.63%
Standard Deviation:				7.50%		3.13%

		AbbVie Inc. (ABBV)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_ABBV,t¹	Dividend_ABBV,t¹	R_ABBV,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Jan 31, 2014	49.23			1,782.59
1.	Feb 28, 2014	50.91		3.41%	1,859.45	4.31%
2.	Mar 31, 2014	51.40		0.96%	1,872.34	0.69%
3.	Apr 30, 2014	52.08	0.42	2.14%	1,883.95	0.62%
4.	May 31, 2014	54.33		4.32%	1,923.57	2.10%
5.	Jun 30, 2014	56.44		3.88%	1,960.23	1.91%
6.	Jul 31, 2014	52.34	0.42	-6.52%	1,930.67	-1.51%
7.	Aug 31, 2014	55.28		5.62%	2,003.37	3.77%
8.	Sep 30, 2014	57.76		4.49%	1,972.29	-1.55%
9.	Oct 31, 2014	63.46	0.42	10.60%	2,018.05	2.32%
10.	Nov 30, 2014	69.20		9.05%	2,067.56	2.45%
11.	Dec 31, 2014	65.44		-5.43%	2,058.90	-0.42%
12.	Jan 31, 2015	60.35	0.49	-7.03%	1,994.99	-3.10%
13.	Feb 28, 2015	60.50		0.25%	2,104.50	5.49%
14.	Mar 31, 2015	58.54		-3.24%	2,067.89	-1.74%
15.	Apr 30, 2015	64.66	0.51	11.33%	2,085.51	0.85%
16.	May 31, 2015	66.59		2.98%	2,107.39	1.05%
17.	Jun 30, 2015	67.19		0.90%	2,063.11	-2.10%
18.	Jul 31, 2015	70.01	0.51	4.96%	2,103.84	1.97%
19.	Aug 31, 2015	62.41		-10.86%	1,972.18	-6.26%
20.	Sep 30, 2015	54.41		-12.82%	1,920.03	-2.64%
21.	Oct 31, 2015	59.55	0.51	10.38%	2,079.36	8.30%
22.	Nov 30, 2015	58.15		-2.35%	2,080.41	0.05%
23.	Dec 31, 2015	59.24		1.87%	2,043.94	-1.75%
24.	Jan 31, 2016	54.90	0.57	-6.36%	1,940.24	-5.07%
25.	Feb 29, 2016	54.61		-0.53%	1,932.23	-0.41%
26.	Mar 31, 2016	57.12		4.60%	2,059.74	6.60%
27.	Apr 30, 2016	61.00	0.57	7.79%	2,065.30	0.27%
28.	May 31, 2016	62.93		3.16%	2,096.95	1.53%
29.	Jun 30, 2016	61.91		-1.62%	2,098.86	0.09%
30.	Jul 31, 2016	66.23	0.57	7.90%	2,173.60	3.56%
31.	Aug 31, 2016	64.10		-3.22%	2,170.95	-0.12%
32.	Sep 30, 2016	63.07		-1.61%	2,168.27	-0.12%
33.	Oct 31, 2016	55.78	0.57	-10.65%	2,126.15	-1.94%
34.	Nov 30, 2016	60.80		9.00%	2,198.81	3.42%
35.	Dec 31, 2016	62.62		2.99%	2,238.83	1.82%
36.	Jan 31, 2017	61.11	0.64	-1.39%	2,278.87	1.79%
37.	Feb 28, 2017	61.84		1.19%	2,363.64	3.72%
38.	Mar 31, 2017	65.16		5.37%	2,362.72	-0.04%
39.	Apr 30, 2017	65.94	0.64	2.18%	2,384.20	0.91%
40.	May 31, 2017	66.02		0.12%	2,411.80	1.16%
41.	Jun 30, 2017	72.51		9.83%	2,423.41	0.48%
42.	Jul 31, 2017	69.91	0.64	-2.70%	2,470.30	1.93%
43.	Aug 31, 2017	75.30		7.71%	2,471.65	0.05%
44.	Sep 30, 2017	88.86		18.01%	2,519.36	1.93%
45.	Oct 31, 2017	90.25	0.64	2.28%	2,575.26	2.22%
46.	Nov 30, 2017	96.92		7.39%	2,647.58	2.81%
47.	Dec 31, 2017	96.71		-0.22%	2,673.61	0.98%
48.	Jan 31, 2018	112.22	0.71	16.77%	2,823.81	5.62%
49.	Feb 28, 2018	115.83		3.22%	2,713.83	-3.89%
50.	Mar 31, 2018	94.65		-18.29%	2,640.87	-2.69%
51.	Apr 30, 2018	96.55	0.96	3.02%	2,648.05	0.27%
52.	May 31, 2018	98.94		2.48%	2,705.27	2.16%
53.	Jun 30, 2018	92.65		-6.36%	2,718.37	0.48%
54.	Jul 31, 2018	92.23	0.96	0.58%	2,816.29	3.60%
55.	Aug 31, 2018	95.98		4.07%	2,901.52	3.03%
56.	Sep 30, 2018	94.58		-1.46%	2,913.98	0.43%
57.	Oct 31, 2018	77.85	0.96	-16.67%	2,711.74	-6.94%
58.	Nov 30, 2018	94.27		21.09%	2,760.17	1.79%
59.	Dec 31, 2018	92.19		-2.21%	2,506.85	-9.18%
Average:				1.63%		0.63%
Standard Deviation:				7.50%		3.13%

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 ABBV during period t

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

Systematic Risk (β) Estimation

Variance_ABBV	56.20
Variance_{S&P 500}	9.77
Covariance_{ABBV, S&P 500}	14.15
Correlation Coefficient_{ABBV, S&P 500}¹	0.60
β_ABBV²	1.45
α_ABBV³	0.72

Calculations

¹ Covariance_{ABBV, S&P 500} ÷ (Standard Deviation_ABBV × Standard Deviation_{S&P 500})
= 14.15 ÷ (7.50 × 3.13)

² Covariance_{ABBV, S&P 500} ÷ Variance_{S&P 500}
= 14.15 ÷ 9.77

³ Average_ABBV – β_ABBV × Average_{S&P 500}
= 1.63 – 1.45 × 0.63

Expected Rate of Return

Assumptions
Rate of return on LT Treasury Composite¹	R_F	2.87%
Expected rate of return on market portfolio²	E(R_M)	12.03%
Systematic risk (β) of AbbVie Inc.’s common stock	β_ABBV	1.45

Expected rate of return on AbbVie Inc.’s common stock³	E(R_ABBV)	16.13%

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(R_ABBV) = R_F + β_ABBV [E(R_M) – R_F]
= 2.87% + 1.45 [12.03% – 2.87%]
= 16.13%