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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
Bristol-Myers Squibb Co., monthly rates of return
| Bristol-Myers Squibb Co. (BMY) | Standard & Poor’s 500 (S&P 500) | |||||
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| t | Date | PriceBMY,t1 | DividendBMY,t1 | RBMY,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jan 31, 2013 | |
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| 1. | Feb 28, 2013 | |
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| 2. | Mar 31, 2013 | |
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| 3. | Apr 30, 2013 | |
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| 58. | Nov 30, 2017 | |
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| 59. | Dec 31, 2017 | |
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| Average: | |
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| Standard Deviation: | |
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| 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 | |
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| 1. | Feb 28, 2013 | |
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| 2. | Mar 31, 2013 | |
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| 3. | Apr 30, 2013 | |
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| 4. | May 31, 2013 | |
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| 5. | Jun 30, 2013 | |
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| 6. | Jul 31, 2013 | |
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| 7. | Aug 31, 2013 | |
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| 8. | Sep 30, 2013 | |
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| 9. | Oct 31, 2013 | |
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| 10. | Nov 30, 2013 | |
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| 11. | Dec 31, 2013 | |
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| 12. | Jan 31, 2014 | |
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| 13. | Feb 28, 2014 | |
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| 14. | Mar 31, 2014 | |
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| 15. | Apr 30, 2014 | |
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| 16. | May 31, 2014 | |
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| 17. | Jun 30, 2014 | |
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| 18. | Jul 31, 2014 | |
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| 19. | Aug 31, 2014 | |
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| 20. | Sep 30, 2014 | |
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| 21. | Oct 31, 2014 | |
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| 22. | Nov 30, 2014 | |
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| 23. | Dec 31, 2014 | |
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| 24. | Jan 31, 2015 | |
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| 25. | Feb 28, 2015 | |
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| 26. | Mar 31, 2015 | |
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| 27. | Apr 30, 2015 | |
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| 28. | May 31, 2015 | |
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| 29. | Jun 30, 2015 | |
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| 30. | Jul 31, 2015 | |
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| 31. | Aug 31, 2015 | |
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| 32. | Sep 30, 2015 | |
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| 33. | Oct 31, 2015 | |
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| 34. | Nov 30, 2015 | |
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| 35. | Dec 31, 2015 | |
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| 36. | Jan 31, 2016 | |
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| 37. | Feb 29, 2016 | |
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| 38. | Mar 31, 2016 | |
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| 39. | Apr 30, 2016 | |
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| 40. | May 31, 2016 | |
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| 41. | Jun 30, 2016 | |
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| 42. | Jul 31, 2016 | |
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| 43. | Aug 31, 2016 | |
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| 44. | Sep 30, 2016 | |
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| 45. | Oct 31, 2016 | |
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| 46. | Nov 30, 2016 | |
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| 47. | Dec 31, 2016 | |
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| 48. | Jan 31, 2017 | |
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| 49. | Feb 28, 2017 | |
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| 50. | Mar 31, 2017 | |
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| 51. | Apr 30, 2017 | |
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| 52. | May 31, 2017 | |
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| 53. | Jun 30, 2017 | |
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| 54. | Jul 31, 2017 | |
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| 55. | Aug 31, 2017 | |
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| 56. | Sep 30, 2017 | |
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| 57. | Oct 31, 2017 | |
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| 58. | Nov 30, 2017 | |
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| 59. | Dec 31, 2017 | |
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| Average: | |
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| Standard Deviation: | |
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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 Bristol-Myers Squibb Co.’s common stock | βBMY | |
| Expected rate of return on Bristol-Myers Squibb Co.’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]
= + [ – ]
=