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 BMS's common stock.
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 | PriceBMY,t1 | DividendBMY,t1 | RBMY,t2 | PriceS&P 500,t | RS&P 500,t3 |
Jan 31, 2013 | ||||||
1. | Feb 28, 2013 | % | % | |||
2. | Mar 31, 2013 | % | % | |||
3. | Apr 30, 2013 | % | % | |||
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58. | Nov 30, 2017 | % | % | |||
59. | Dec 31, 2017 | % | % | |||
Average: | % | % | ||||
Standard Deviation: | % | % |
Bristol-Myers Squibb Co. (BMY) | Standard & Poor's 500 (S&P 500) | |||||
---|---|---|---|---|---|---|
t | Date | PriceBMY,t1 | DividendBMY,t1 | RBMY,t2 | PriceS&P 500,t | RS&P 500,t3 |
Jan 31, 2013 | ||||||
1. | Feb 28, 2013 | % | % | |||
2. | Mar 31, 2013 | % | % | |||
3. | Apr 30, 2013 | % | % | |||
4. | May 31, 2013 | % | % | |||
5. | Jun 30, 2013 | % | % | |||
6. | Jul 31, 2013 | % | % | |||
7. | Aug 31, 2013 | % | % | |||
8. | Sep 30, 2013 | % | % | |||
9. | Oct 31, 2013 | % | % | |||
10. | Nov 30, 2013 | % | % | |||
11. | Dec 31, 2013 | % | % | |||
12. | Jan 31, 2014 | % | % | |||
13. | Feb 28, 2014 | % | % | |||
14. | Mar 31, 2014 | % | % | |||
15. | Apr 30, 2014 | % | % | |||
16. | May 31, 2014 | % | % | |||
17. | Jun 30, 2014 | % | % | |||
18. | Jul 31, 2014 | % | % | |||
19. | Aug 31, 2014 | % | % | |||
20. | Sep 30, 2014 | % | % | |||
21. | Oct 31, 2014 | % | % | |||
22. | Nov 30, 2014 | % | % | |||
23. | Dec 31, 2014 | % | % | |||
24. | Jan 31, 2015 | % | % | |||
25. | Feb 28, 2015 | % | % | |||
26. | Mar 31, 2015 | % | % | |||
27. | Apr 30, 2015 | % | % | |||
28. | May 31, 2015 | % | % | |||
29. | Jun 30, 2015 | % | % | |||
30. | Jul 31, 2015 | % | % | |||
31. | Aug 31, 2015 | % | % | |||
32. | Sep 30, 2015 | % | % | |||
33. | Oct 31, 2015 | % | % | |||
34. | Nov 30, 2015 | % | % | |||
35. | Dec 31, 2015 | % | % | |||
36. | Jan 31, 2016 | % | % | |||
37. | Feb 29, 2016 | % | % | |||
38. | Mar 31, 2016 | % | % | |||
39. | Apr 30, 2016 | % | % | |||
40. | May 31, 2016 | % | % | |||
41. | Jun 30, 2016 | % | % | |||
42. | Jul 31, 2016 | % | % | |||
43. | Aug 31, 2016 | % | % | |||
44. | Sep 30, 2016 | % | % | |||
45. | Oct 31, 2016 | % | % | |||
46. | Nov 30, 2016 | % | % | |||
47. | Dec 31, 2016 | % | % | |||
48. | Jan 31, 2017 | % | % | |||
49. | Feb 28, 2017 | % | % | |||
50. | Mar 31, 2017 | % | % | |||
51. | Apr 30, 2017 | % | % | |||
52. | May 31, 2017 | % | % | |||
53. | Jun 30, 2017 | % | % | |||
54. | Jul 31, 2017 | % | % | |||
55. | Aug 31, 2017 | % | % | |||
56. | Sep 30, 2017 | % | % | |||
57. | Oct 31, 2017 | % | % | |||
58. | Nov 30, 2017 | % | % | |||
59. | Dec 31, 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 BMY during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Systematic Risk (β) Estimation
VarianceBMY | |
VarianceS&P 500 | |
CovarianceBMY, S&P 500 | |
Correlation CoefficientBMY, S&P 5001 | |
βBMY2 | |
αBMY3 |
Calculations
1 CovarianceBMY, S&P 500 ÷ (Standard DeviationBMY × Standard DeviationS&P 500)
= ÷ ( × )
2 CovarianceBMY, S&P 500 ÷ VarianceS&P 500
= ÷
3 AverageBMY – βBMY × AverageS&P 500
= – ×
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 BMS's common stock | βBMY | |
Expected rate of return on BMS's common stock3 | E(RBMY) | % |
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
3 E(RBMY) = RF + βBMY [E(RM) – RF]
= % + [% – %]
= %