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 FedEx's common stock.


Rates of Return

FedEx Corp., monthly rates of return

 
FedEx Corp. (FDX) Standard & Poor's 500 (S&P 500)
t Date PriceFDX,t1 DividendFDX,t1 RFDX,t2 PriceS&P 500,t RS&P 500,t3
Jun 30, 2011 94.85 1,320.64
1. Jul 31, 2011 86.88 -8.40% 1,292.28 -2.15%
2. Aug 31, 2011 78.72 -9.39% 1,218.89 -5.68%
3. Sep 30, 2011 67.68 0.13 -13.86% 1,131.42 -7.18%
. . . . . . .
. . . . . . .
. . . . . . .
70. Apr 30, 2017 189.70 -2.79% 2,384.20 0.91%
71. May 31, 2017 193.84 2.18% 2,411.80 1.16%
Average: 1.26% 0.90%
Standard Deviation: 6.42% 3.28%
FedEx Corp. (FDX) Standard & Poor's 500 (S&P 500)
t Date PriceFDX,t1 DividendFDX,t1 RFDX,t2 PriceS&P 500,t RS&P 500,t3
Jun 30, 2011 94.85 1,320.64
1. Jul 31, 2011 86.88 -8.40% 1,292.28 -2.15%
2. Aug 31, 2011 78.72 -9.39% 1,218.89 -5.68%
3. Sep 30, 2011 67.68 0.13 -13.86% 1,131.42 -7.18%
4. Oct 31, 2011 81.83 20.91% 1,253.30 10.77%
5. Nov 30, 2011 83.08 1.53% 1,246.96 -0.51%
6. Dec 31, 2011 83.51 0.13 0.67% 1,257.60 0.85%
7. Jan 31, 2012 91.49 9.56% 1,312.41 4.36%
8. Feb 29, 2012 89.99 -1.64% 1,365.68 4.06%
9. Mar 31, 2012 91.96 0.13 2.33% 1,408.47 3.13%
10. Apr 30, 2012 88.24 -4.05% 1,397.91 -0.75%
11. May 31, 2012 89.14 1.02% 1,310.33 -6.27%
12. Jun 30, 2012 91.61 0.14 2.93% 1,362.16 3.96%
13. Jul 31, 2012 90.30 -1.43% 1,379.32 1.26%
14. Aug 31, 2012 87.63 -2.96% 1,406.58 1.98%
15. Sep 30, 2012 84.62 0.14 -3.28% 1,440.67 2.42%
16. Oct 31, 2012 91.99 8.71% 1,412.16 -1.98%
17. Nov 30, 2012 89.53 0.14 -2.52% 1,416.18 0.28%
18. Dec 31, 2012 91.72 2.45% 1,426.19 0.71%
19. Jan 31, 2013 101.45 10.61% 1,498.11 5.04%
20. Feb 28, 2013 105.43 3.92% 1,514.68 1.11%
21. Mar 31, 2013 98.20 0.14 -6.72% 1,569.19 3.60%
22. Apr 30, 2013 94.01 -4.27% 1,597.57 1.81%
23. May 31, 2013 96.34 2.48% 1,630.74 2.08%
24. Jun 30, 2013 98.58 0.15 2.48% 1,606.28 -1.50%
25. Jul 31, 2013 106.00 7.53% 1,685.73 4.95%
26. Aug 31, 2013 107.36 1.28% 1,632.97 -3.13%
27. Sep 30, 2013 114.11 0.15 6.43% 1,681.55 2.97%
28. Oct 31, 2013 131.00 14.80% 1,756.54 4.46%
29. Nov 30, 2013 138.70 5.88% 1,805.81 2.80%
30. Dec 31, 2013 143.77 0.15 3.76% 1,848.36 2.36%
31. Jan 31, 2014 133.32 -7.27% 1,782.59 -3.56%
32. Feb 28, 2014 133.33 0.01% 1,859.45 4.31%
33. Mar 31, 2014 132.56 0.15 -0.47% 1,872.34 0.69%
34. Apr 30, 2014 136.25 2.78% 1,883.95 0.62%
35. May 31, 2014 144.16 5.81% 1,923.57 2.10%
36. Jun 30, 2014 151.38 0.20 5.15% 1,960.23 1.91%
37. Jul 31, 2014 146.88 -2.97% 1,930.67 -1.51%
38. Aug 31, 2014 147.88 0.68% 2,003.37 3.77%
39. Sep 30, 2014 161.45 0.20 9.31% 1,972.29 -1.55%
40. Oct 31, 2014 167.40 3.69% 2,018.05 2.32%
41. Nov 30, 2014 178.18 6.44% 2,067.56 2.45%
42. Dec 31, 2014 173.66 0.20 -2.42% 2,058.90 -0.42%
43. Jan 31, 2015 169.11 -2.62% 1,994.99 -3.10%
44. Feb 28, 2015 176.98 4.65% 2,104.50 5.49%
45. Mar 31, 2015 165.45 0.20 -6.40% 2,067.89 -1.74%
46. Apr 30, 2015 169.57 2.49% 2,085.51 0.85%
47. May 31, 2015 173.22 2.15% 2,107.39 1.05%
48. Jun 30, 2015 170.40 0.25 -1.48% 2,063.11 -2.10%
49. Jul 31, 2015 171.42 0.60% 2,103.84 1.97%
50. Aug 31, 2015 150.61 -12.14% 1,972.18 -6.26%
51. Sep 30, 2015 143.98 0.25 -4.24% 1,920.03 -2.64%
52. Oct 31, 2015 156.05 8.38% 2,079.36 8.30%
53. Nov 30, 2015 158.54 1.60% 2,080.41 0.05%
54. Dec 31, 2015 148.99 0.25 -5.87% 2,043.94 -1.75%
55. Jan 31, 2016 132.88 -10.81% 1,940.24 -5.07%
56. Feb 29, 2016 136.88 3.01% 1,932.23 -0.41%
57. Mar 31, 2016 162.72 0.25 19.06% 2,059.74 6.60%
58. Apr 30, 2016 165.11 1.47% 2,065.30 0.27%
59. May 31, 2016 164.97 -0.08% 2,096.95 1.53%
60. Jun 30, 2016 151.78 0.40 -7.75% 2,098.86 0.09%
61. Jul 31, 2016 161.90 6.67% 2,173.60 3.56%
62. Aug 31, 2016 164.93 1.87% 2,170.95 -0.12%
63. Sep 30, 2016 174.68 0.40 6.15% 2,168.27 -0.12%
64. Oct 31, 2016 174.32 -0.21% 2,126.15 -1.94%
65. Nov 30, 2016 191.67 9.95% 2,198.81 3.42%
66. Dec 31, 2016 186.20 0.40 -2.65% 2,238.83 1.82%
67. Jan 31, 2017 189.11 1.56% 2,278.87 1.79%
68. Feb 28, 2017 192.98 2.05% 2,363.64 3.72%
69. Mar 31, 2017 195.15 0.40 1.33% 2,362.72 -0.04%
70. Apr 30, 2017 189.70 -2.79% 2,384.20 0.91%
71. May 31, 2017 193.84 2.18% 2,411.80 1.16%
Average: 1.26% 0.90%
Standard Deviation: 6.42% 3.28%

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 FDX during period t

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

Top


Systematic Risk (β) Estimation

 
VarianceFDX 41.17
VarianceS&P 500 10.77
CovarianceFDX, S&P 500 14.77
Correlation CoefficientFDX, S&P 5001 0.70
βFDX2 1.37
αFDX3 0.02

Calculations

1 CovarianceFDX, S&P 500 ÷ (Standard DeviationFDX × Standard DeviationS&P 500)
= 14.77 ÷ (6.42 × 3.28)

2 CovarianceFDX, S&P 500 ÷ VarianceS&P 500
= 14.77 ÷ 10.77

3 AverageFDX – βFDX × AverageS&P 500
= 1.26 – 1.37 × 0.90

Top


Expected Rate of Return

 
Assumptions
Rate of return on LT Treasury Composite1 RF 3.00%
Expected rate of return on market portfolio2 E(RM) 12.42%
Systematic risk (β) of FedEx's common stock βFDX 1.37
Expected rate of return on FedEx's common stock3 E(RFDX) 15.92%

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(RFDX) = RF + βFDX [E(RM) – RF]
= 3.00% + 1.37 [12.42% – 3.00%]
= 15.92%

Top