Bristol-Myers Squibb Co. (BMY)

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 Bristol-Myers Squibb Co.’s common stock.

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

Rates of Return

Bristol-Myers Squibb Co., monthly rates of return

		Bristol-Myers Squibb Co. (BMY)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_BMY,t¹	Dividend_BMY,t¹	R_BMY,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Jan 31, 2014	49.97			1,782.59
1.	Feb 28, 2014	53.77		7.60%	1,859.45	4.31%
2.	Mar 31, 2014	51.95		-3.38%	1,872.34	0.69%
3.	Apr 30, 2014	50.09	0.36	-2.89%	1,883.95	0.62%
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58.	Nov 30, 2018	53.46		5.78%	2,760.17	1.79%
59.	Dec 31, 2018	51.98		-2.77%	2,506.85	-9.18%
Average:				0.55%		0.63%
Standard Deviation:				7.23%		3.13%

		Bristol-Myers Squibb Co. (BMY)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_BMY,t¹	Dividend_BMY,t¹	R_BMY,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Jan 31, 2014	49.97			1,782.59
1.	Feb 28, 2014	53.77		7.60%	1,859.45	4.31%
2.	Mar 31, 2014	51.95		-3.38%	1,872.34	0.69%
3.	Apr 30, 2014	50.09	0.36	-2.89%	1,883.95	0.62%
4.	May 31, 2014	49.74		-0.70%	1,923.57	2.10%
5.	Jun 30, 2014	48.51		-2.47%	1,960.23	1.91%
6.	Jul 31, 2014	50.62	0.36	5.09%	1,930.67	-1.51%
7.	Aug 31, 2014	50.65		0.06%	2,003.37	3.77%
8.	Sep 30, 2014	51.18		1.05%	1,972.29	-1.55%
9.	Oct 31, 2014	58.19	0.36	14.40%	2,018.05	2.32%
10.	Nov 30, 2014	59.05		1.48%	2,067.56	2.45%
11.	Dec 31, 2014	59.03	0.37	0.59%	2,058.90	-0.42%
12.	Jan 31, 2015	60.27		2.10%	1,994.99	-3.10%
13.	Feb 28, 2015	60.92		1.08%	2,104.50	5.49%
14.	Mar 31, 2015	64.50		5.88%	2,067.89	-1.74%
15.	Apr 30, 2015	63.73	0.37	-0.62%	2,085.51	0.85%
16.	May 31, 2015	64.60		1.37%	2,107.39	1.05%
17.	Jun 30, 2015	66.54		3.00%	2,063.11	-2.10%
18.	Jul 31, 2015	65.64	0.37	-0.80%	2,103.84	1.97%
19.	Aug 31, 2015	59.47		-9.40%	1,972.18	-6.26%
20.	Sep 30, 2015	59.20	0.37	0.17%	1,920.03	-2.64%
21.	Oct 31, 2015	65.95		11.40%	2,079.36	8.30%
22.	Nov 30, 2015	67.01		1.61%	2,080.41	0.05%
23.	Dec 31, 2015	68.79	0.38	3.22%	2,043.94	-1.75%
24.	Jan 31, 2016	62.16		-9.64%	1,940.24	-5.07%
25.	Feb 29, 2016	61.93		-0.37%	1,932.23	-0.41%
26.	Mar 31, 2016	63.88	0.38	3.76%	2,059.74	6.60%
27.	Apr 30, 2016	72.18		12.99%	2,065.30	0.27%
28.	May 31, 2016	71.70		-0.67%	2,096.95	1.53%
29.	Jun 30, 2016	73.55	0.38	3.11%	2,098.86	0.09%
30.	Jul 31, 2016	74.81		1.71%	2,173.60	3.56%
31.	Aug 31, 2016	57.39		-23.29%	2,170.95	-0.12%
32.	Sep 30, 2016	53.92		-6.05%	2,168.27	-0.12%
33.	Oct 31, 2016	50.91	0.38	-4.88%	2,126.15	-1.94%
34.	Nov 30, 2016	56.44		10.86%	2,198.81	3.42%
35.	Dec 31, 2016	58.44		3.54%	2,238.83	1.82%
36.	Jan 31, 2017	49.16	0.39	-15.21%	2,278.87	1.79%
37.	Feb 28, 2017	56.71		15.36%	2,363.64	3.72%
38.	Mar 31, 2017	54.38		-4.11%	2,362.72	-0.04%
39.	Apr 30, 2017	56.05	0.39	3.79%	2,384.20	0.91%
40.	May 31, 2017	53.95		-3.75%	2,411.80	1.16%
41.	Jun 30, 2017	55.72		3.28%	2,423.41	0.48%
42.	Jul 31, 2017	56.90	0.39	2.82%	2,470.30	1.93%
43.	Aug 31, 2017	60.48		6.29%	2,471.65	0.05%
44.	Sep 30, 2017	63.74		5.39%	2,519.36	1.93%
45.	Oct 31, 2017	61.66	0.39	-2.65%	2,575.26	2.22%
46.	Nov 30, 2017	63.19		2.48%	2,647.58	2.81%
47.	Dec 31, 2017	61.28		-3.02%	2,673.61	0.98%
48.	Jan 31, 2018	62.60	0.40	2.81%	2,823.81	5.62%
49.	Feb 28, 2018	66.20		5.75%	2,713.83	-3.89%
50.	Mar 31, 2018	63.25		-4.46%	2,640.87	-2.69%
51.	Apr 30, 2018	52.13	0.40	-16.95%	2,648.05	0.27%
52.	May 31, 2018	52.62		0.94%	2,705.27	2.16%
53.	Jun 30, 2018	55.34		5.17%	2,718.37	0.48%
54.	Jul 31, 2018	58.75	0.40	6.88%	2,816.29	3.60%
55.	Aug 31, 2018	60.55		3.06%	2,901.52	3.03%
56.	Sep 30, 2018	62.08		2.53%	2,913.98	0.43%
57.	Oct 31, 2018	50.54	0.40	-17.94%	2,711.74	-6.94%
58.	Nov 30, 2018	53.46		5.78%	2,760.17	1.79%
59.	Dec 31, 2018	51.98		-2.77%	2,506.85	-9.18%
Average:				0.55%		0.63%
Standard Deviation:				7.23%		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 BMY during period t

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

Systematic Risk (β) Estimation

Variance_BMY	52.29
Variance_{S&P 500}	9.77
Covariance_{BMY, S&P 500}	9.39
Correlation Coefficient_{BMY, S&P 500}¹	0.42
β_BMY²	0.96
α_BMY³	-0.05

Calculations

¹ Covariance_{BMY, S&P 500} ÷ (Standard Deviation_BMY × Standard Deviation_{S&P 500})
= 9.39 ÷ (7.23 × 3.13)

² Covariance_{BMY, S&P 500} ÷ Variance_{S&P 500}
= 9.39 ÷ 9.77

³ Average_BMY – β_BMY × Average_{S&P 500}
= 0.55 – 0.96 × 0.63

Expected Rate of Return

Assumptions
Rate of return on LT Treasury Composite¹	R_F	2.43%
Expected rate of return on market portfolio²	E(R_M)	11.82%
Systematic risk (β) of Bristol-Myers Squibb Co.’s common stock	β_BMY	0.96

Expected rate of return on Bristol-Myers Squibb Co.’s common stock³	E(R_BMY)	11.46%

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_BMY) = R_F + β_BMY [E(R_M) – R_F]
= 2.43% + 0.96 [11.82% – 2.43%]
= 11.46%