Capital Asset Pricing Model (CAPM)
Intermediate level
Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like Colgate-Palmolive Co.’s common stock.
Rates of Return
Colgate-Palmolive Co., monthly rates of return
| Colgate-Palmolive Co. (CL) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceCL,t1 | DividendCL,t1 | RCL,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jan 31, 2015 | 67.52 | 1,994.99 | ||||
| 1. | Feb 28, 2015 | 70.82 | 4.89% | 2,104.50 | 5.49% | |
| 2. | Mar 31, 2015 | 69.34 | -2.09% | 2,067.89 | -1.74% | |
| 3. | Apr 30, 2015 | 67.28 | 0.38 | -2.42% | 2,085.51 | 0.85% |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 58. | Nov 30, 2019 | 67.82 | -1.14% | 3,140.98 | 3.40% | |
| 59. | Dec 31, 2019 | 68.84 | 1.50% | 3,230.78 | 2.86% | |
| Average: | 0.32% | 0.88% | ||||
| Standard deviation: | 4.50% | 3.45% | ||||
| Colgate-Palmolive Co. (CL) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceCL,t1 | DividendCL,t1 | RCL,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jan 31, 2015 | 67.52 | 1,994.99 | ||||
| 1. | Feb 28, 2015 | 70.82 | 4.89% | 2,104.50 | 5.49% | |
| 2. | Mar 31, 2015 | 69.34 | -2.09% | 2,067.89 | -1.74% | |
| 3. | Apr 30, 2015 | 67.28 | 0.38 | -2.42% | 2,085.51 | 0.85% |
| 4. | May 31, 2015 | 66.79 | -0.73% | 2,107.39 | 1.05% | |
| 5. | Jun 30, 2015 | 65.41 | -2.07% | 2,063.11 | -2.10% | |
| 6. | Jul 31, 2015 | 68.02 | 0.38 | 4.57% | 2,103.84 | 1.97% |
| 7. | Aug 31, 2015 | 62.81 | -7.66% | 1,972.18 | -6.26% | |
| 8. | Sep 30, 2015 | 63.46 | 1.03% | 1,920.03 | -2.64% | |
| 9. | Oct 31, 2015 | 66.35 | 0.38 | 5.15% | 2,079.36 | 8.30% |
| 10. | Nov 30, 2015 | 65.68 | -1.01% | 2,080.41 | 0.05% | |
| 11. | Dec 31, 2015 | 66.62 | 1.43% | 2,043.94 | -1.75% | |
| 12. | Jan 31, 2016 | 67.53 | 0.38 | 1.94% | 1,940.24 | -5.07% |
| 13. | Feb 29, 2016 | 65.64 | -2.80% | 1,932.23 | -0.41% | |
| 14. | Mar 31, 2016 | 70.65 | 7.63% | 2,059.74 | 6.60% | |
| 15. | Apr 30, 2016 | 70.92 | 0.39 | 0.93% | 2,065.30 | 0.27% |
| 16. | May 31, 2016 | 70.41 | -0.72% | 2,096.95 | 1.53% | |
| 17. | Jun 30, 2016 | 73.20 | 3.96% | 2,098.86 | 0.09% | |
| 18. | Jul 31, 2016 | 74.43 | 0.39 | 2.21% | 2,173.60 | 3.56% |
| 19. | Aug 31, 2016 | 74.34 | -0.12% | 2,170.95 | -0.12% | |
| 20. | Sep 30, 2016 | 74.14 | -0.27% | 2,168.27 | -0.12% | |
| 21. | Oct 31, 2016 | 71.36 | 0.39 | -3.22% | 2,126.15 | -1.94% |
| 22. | Nov 30, 2016 | 65.23 | -8.59% | 2,198.81 | 3.42% | |
| 23. | Dec 31, 2016 | 65.44 | 0.32% | 2,238.83 | 1.82% | |
| 24. | Jan 31, 2017 | 64.58 | 0.39 | -0.72% | 2,278.87 | 1.79% |
| 25. | Feb 28, 2017 | 72.98 | 13.01% | 2,363.64 | 3.72% | |
| 26. | Mar 31, 2017 | 73.19 | 0.29% | 2,362.72 | -0.04% | |
| 27. | Apr 30, 2017 | 72.04 | 0.40 | -1.02% | 2,384.20 | 0.91% |
| 28. | May 31, 2017 | 76.36 | 6.00% | 2,411.80 | 1.16% | |
| 29. | Jun 30, 2017 | 74.13 | -2.92% | 2,423.41 | 0.48% | |
| 30. | Jul 31, 2017 | 72.20 | 0.40 | -2.06% | 2,470.30 | 1.93% |
| 31. | Aug 31, 2017 | 71.64 | -0.78% | 2,471.65 | 0.05% | |
| 32. | Sep 30, 2017 | 72.85 | 1.69% | 2,519.36 | 1.93% | |
| 33. | Oct 31, 2017 | 70.45 | 0.40 | -2.75% | 2,575.26 | 2.22% |
| 34. | Nov 30, 2017 | 72.45 | 2.84% | 2,647.58 | 2.81% | |
| 35. | Dec 31, 2017 | 75.45 | 4.14% | 2,673.61 | 0.98% | |
| 36. | Jan 31, 2018 | 74.24 | 0.40 | -1.07% | 2,823.81 | 5.62% |
| 37. | Feb 28, 2018 | 68.97 | -7.10% | 2,713.83 | -3.89% | |
| 38. | Mar 31, 2018 | 71.68 | 3.93% | 2,640.87 | -2.69% | |
| 39. | Apr 30, 2018 | 65.23 | 0.42 | -8.41% | 2,648.05 | 0.27% |
| 40. | May 31, 2018 | 63.09 | -3.28% | 2,705.27 | 2.16% | |
| 41. | Jun 30, 2018 | 64.81 | 2.73% | 2,718.37 | 0.48% | |
| 42. | Jul 31, 2018 | 67.01 | 0.42 | 4.04% | 2,816.29 | 3.60% |
| 43. | Aug 31, 2018 | 66.41 | -0.90% | 2,901.52 | 3.03% | |
| 44. | Sep 30, 2018 | 66.95 | 0.81% | 2,913.98 | 0.43% | |
| 45. | Oct 31, 2018 | 59.55 | 0.42 | -10.43% | 2,711.74 | -6.94% |
| 46. | Nov 30, 2018 | 63.52 | 6.67% | 2,760.17 | 1.79% | |
| 47. | Dec 31, 2018 | 59.52 | -6.30% | 2,506.85 | -9.18% | |
| 48. | Jan 31, 2019 | 64.68 | 0.42 | 9.38% | 2,704.10 | 7.87% |
| 49. | Feb 28, 2019 | 65.87 | 1.84% | 2,784.49 | 2.97% | |
| 50. | Mar 31, 2019 | 68.54 | 4.05% | 2,834.40 | 1.79% | |
| 51. | Apr 30, 2019 | 72.79 | 0.43 | 6.83% | 2,945.83 | 3.93% |
| 52. | May 31, 2019 | 69.62 | -4.35% | 2,752.06 | -6.58% | |
| 53. | Jun 30, 2019 | 71.67 | 2.94% | 2,941.76 | 6.89% | |
| 54. | Jul 31, 2019 | 71.74 | 0.43 | 0.70% | 2,980.38 | 1.31% |
| 55. | Aug 31, 2019 | 74.15 | 3.36% | 2,926.46 | -1.81% | |
| 56. | Sep 30, 2019 | 73.51 | -0.86% | 2,976.74 | 1.72% | |
| 57. | Oct 31, 2019 | 68.60 | 0.43 | -6.09% | 3,037.56 | 2.04% |
| 58. | Nov 30, 2019 | 67.82 | -1.14% | 3,140.98 | 3.40% | |
| 59. | Dec 31, 2019 | 68.84 | 1.50% | 3,230.78 | 2.86% | |
| Average: | 0.32% | 0.88% | ||||
| Standard deviation: | 4.50% | 3.45% | ||||
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 CL during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Systematic Risk (β) Estimation
| VarianceCL | 20.29 |
| VarianceS&P 500 | 11.88 |
| CovarianceCL, S&P 500 | 8.52 |
| Correlation coefficientCL, S&P 5001 | 0.55 |
| βCL2 | 0.72 |
| αCL3 | -0.31 |
Calculations
1 Correlation coefficientCL, S&P 500
= CovarianceCL, S&P 500 ÷ (Standard deviationCL × Standard deviationS&P 500)
= 8.52 ÷ (4.50 × 3.45)
2 βCL
= CovarianceCL, S&P 500 ÷ VarianceS&P 500
= 8.52 ÷ 11.88
3 αCL
= AverageCL – βCL × AverageS&P 500
= 0.32 – 0.72 × 0.88
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 1.31% |
| Expected rate of return on market portfolio2 | E(RM) | 11.87% |
| Systematic risk (β) of Colgate-Palmolive Co.’s common stock | βCL | 0.72 |
| Expected rate of return on Colgate-Palmolive Co.’s common stock3 | E(RCL) | 8.89% |
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).
3 E(RCL) = RF + βCL [E(RM) – RF]
= 1.31% + 0.72 [11.87% – 1.31%]
= 8.89%