Stock Analysis on Net
Stock Analysis on Net
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General Electric Co. (NYSE:GE)

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 General Electric Co.’s common stock.


Rates of Return

General Electric Co., monthly rates of return

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General Electric Co. (GE) Standard & Poor’s 500 (S&P 500)
t Date PriceGE,t1 DividendGE,t1 RGE,t2 PriceS&P 500,t RS&P 500,t3
Jan 31, 2015 23.89 1,994.99
1. Feb 28, 2015 25.99 0.23 9.75% 2,104.50 5.49%
2. Mar 31, 2015 24.81 -4.54% 2,067.89 -1.74%
3. Apr 30, 2015 27.08 9.15% 2,085.51 0.85%
. . . . . . .
. . . . . . .
. . . . . . .
58. Nov 30, 2019 11.27 12.93% 3,140.98 3.40%
59. Dec 31, 2019 11.16 0.01 -0.89% 3,230.78 2.86%
Average: -0.68% 0.88%
Standard deviation: 8.87% 3.45%
General Electric Co. (GE) Standard & Poor’s 500 (S&P 500)
t Date PriceGE,t1 DividendGE,t1 RGE,t2 PriceS&P 500,t RS&P 500,t3
Jan 31, 2015 23.89 1,994.99
1. Feb 28, 2015 25.99 0.23 9.75% 2,104.50 5.49%
2. Mar 31, 2015 24.81 -4.54% 2,067.89 -1.74%
3. Apr 30, 2015 27.08 9.15% 2,085.51 0.85%
4. May 31, 2015 27.27 0.70% 2,107.39 1.05%
5. Jun 30, 2015 26.57 0.23 -1.72% 2,063.11 -2.10%
6. Jul 31, 2015 26.10 -1.77% 2,103.84 1.97%
7. Aug 31, 2015 24.82 -4.90% 1,972.18 -6.26%
8. Sep 30, 2015 25.22 0.23 2.54% 1,920.03 -2.64%
9. Oct 31, 2015 28.92 14.67% 2,079.36 8.30%
10. Nov 30, 2015 29.94 3.53% 2,080.41 0.05%
11. Dec 31, 2015 31.15 0.23 4.81% 2,043.94 -1.75%
12. Jan 31, 2016 29.10 -6.58% 1,940.24 -5.07%
13. Feb 29, 2016 29.14 0.23 0.93% 1,932.23 -0.41%
14. Mar 31, 2016 31.79 9.09% 2,059.74 6.60%
15. Apr 30, 2016 30.75 -3.27% 2,065.30 0.27%
16. May 31, 2016 30.23 -1.69% 2,096.95 1.53%
17. Jun 30, 2016 31.48 0.23 4.90% 2,098.86 0.09%
18. Jul 31, 2016 31.14 -1.08% 2,173.60 3.56%
19. Aug 31, 2016 31.24 0.32% 2,170.95 -0.12%
20. Sep 30, 2016 29.62 0.23 -4.45% 2,168.27 -0.12%
21. Oct 31, 2016 29.10 -1.76% 2,126.15 -1.94%
22. Nov 30, 2016 30.76 5.70% 2,198.81 3.42%
23. Dec 31, 2016 31.60 0.24 3.51% 2,238.83 1.82%
24. Jan 31, 2017 29.70 -6.01% 2,278.87 1.79%
25. Feb 28, 2017 29.81 0.24 1.18% 2,363.64 3.72%
26. Mar 31, 2017 29.80 -0.03% 2,362.72 -0.04%
27. Apr 30, 2017 28.99 -2.72% 2,384.20 0.91%
28. May 31, 2017 27.38 -5.55% 2,411.80 1.16%
29. Jun 30, 2017 27.01 0.24 -0.47% 2,423.41 0.48%
30. Jul 31, 2017 25.61 -5.18% 2,470.30 1.93%
31. Aug 31, 2017 24.55 -4.14% 2,471.65 0.05%
32. Sep 30, 2017 24.18 0.24 -0.53% 2,519.36 1.93%
33. Oct 31, 2017 20.16 -16.63% 2,575.26 2.22%
34. Nov 30, 2017 18.29 -9.28% 2,647.58 2.81%
35. Dec 31, 2017 17.45 0.12 -3.94% 2,673.61 0.98%
36. Jan 31, 2018 16.17 -7.34% 2,823.81 5.62%
37. Feb 28, 2018 14.11 0.12 -12.00% 2,713.83 -3.89%
38. Mar 31, 2018 13.48 -4.46% 2,640.87 -2.69%
39. Apr 30, 2018 14.07 4.38% 2,648.05 0.27%
40. May 31, 2018 14.08 0.07% 2,705.27 2.16%
41. Jun 30, 2018 13.61 0.12 -2.49% 2,718.37 0.48%
42. Jul 31, 2018 13.63 0.15% 2,816.29 3.60%
43. Aug 31, 2018 12.94 -5.06% 2,901.52 3.03%
44. Sep 30, 2018 11.29 0.12 -11.82% 2,913.98 0.43%
45. Oct 31, 2018 10.10 -10.54% 2,711.74 -6.94%
46. Nov 30, 2018 7.50 -25.74% 2,760.17 1.79%
47. Dec 31, 2018 7.57 0.01 1.07% 2,506.85 -9.18%
48. Jan 31, 2019 10.16 34.21% 2,704.10 7.87%
49. Feb 28, 2019 10.39 2.26% 2,784.49 2.97%
50. Mar 31, 2019 9.99 0.01 -3.75% 2,834.40 1.79%
51. Apr 30, 2019 10.17 1.80% 2,945.83 3.93%
52. May 31, 2019 9.44 -7.18% 2,752.06 -6.58%
53. Jun 30, 2019 10.50 0.01 11.33% 2,941.76 6.89%
54. Jul 31, 2019 10.45 -0.48% 2,980.38 1.31%
55. Aug 31, 2019 8.25 -21.05% 2,926.46 -1.81%
56. Sep 30, 2019 8.94 0.01 8.48% 2,976.74 1.72%
57. Oct 31, 2019 9.98 11.63% 3,037.56 2.04%
58. Nov 30, 2019 11.27 12.93% 3,140.98 3.40%
59. Dec 31, 2019 11.16 0.01 -0.89% 3,230.78 2.86%
Average: -0.68% 0.88%
Standard deviation: 8.87% 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 GE during period t

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


Systematic Risk (β) Estimation

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VarianceGE 78.74
VarianceS&P 500 11.88
CovarianceGE, S&P 500 13.78
Correlation coefficientGE, S&P 5001 0.45
βGE2 1.16
αGE3 -1.70

Calculations

1 Correlation coefficientGE, S&P 500
= CovarianceGE, S&P 500 ÷ (Standard deviationGE × Standard deviationS&P 500)
= 13.78 ÷ (8.87 × 3.45)

2 βGE
= CovarianceGE, S&P 500 ÷ VarianceS&P 500
= 13.78 ÷ 11.88

3 αGE
= AverageGE – βGE × AverageS&P 500
= -0.681.16 × 0.88


Expected Rate of Return

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Assumptions
Rate of return on LT Treasury Composite1 RF 1.27%
Expected rate of return on market portfolio2 E(RM) 12.04%
Systematic risk (β) of General Electric Co.’s common stock βGE 1.16
 
Expected rate of return on General Electric Co.’s common stock3 E(RGE) 13.77%

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).

2 See details »

3 E(RGE) = RF + βGE [E(RM) – RF]
= 1.27% + 1.16 [12.04%1.27%]
= 13.77%