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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 Colgate'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, 2013
1. Feb 28, 2013 % %
2. Mar 31, 2013 % %
3. Apr 30, 2013 % %
. . . . . . .
. . . . . . .
. . . . . . .
58. Nov 30, 2017 % %
59. Dec 31, 2017 % %
Average: % %
Standard Deviation: % %
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, 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 CL during period t

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

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Systematic Risk (β) Estimation

 
VarianceCL
VarianceS&P 500
CovarianceCL, S&P 500
Correlation CoefficientCL, S&P 5001
βCL2
αCL3

Calculations

1 CovarianceCL, S&P 500 ÷ (Standard DeviationCL × Standard DeviationS&P 500)
= ÷ ( × )

2 CovarianceCL, S&P 500 ÷ VarianceS&P 500
= ÷

3 AverageCL – βCL × AverageS&P 500
= ×

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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 Colgate's common stock βCL
Expected rate of return on Colgate's common stock3 E(RCL) %

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(RCL) = RF + βCL [E(RM) – RF]
= % + [% – %]
= %

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