Microsoft Excel LibreOffice Calc

Lockheed Martin Corp. (LMT)


Capital Asset Pricing Model (CAPM)

Medium level of difficulty

Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like Lockheed Martin Corp.’s common stock.


Rates of Return

Lockheed Martin Corp., monthly rates of return

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Lockheed Martin Corp. (LMT) Standard & Poor’s 500 (S&P 500)
t Date PriceLMT,t1 DividendLMT,t1 RLMT,t2 PriceS&P 500,t RS&P 500,t3
Jan 31, 2014 150.91 1,782.59
1. Feb 28, 2014 162.30 1.33 8.43% 1,859.45 4.31%
2. Mar 31, 2014 163.24 0.58% 1,872.34 0.69%
3. Apr 30, 2014 164.14 0.55% 1,883.95 0.62%
. . . . . . .
. . . . . . .
. . . . . . .
58. Nov 30, 2018 300.43 2.20 2.99% 2,760.17 1.79%
59. Dec 31, 2018 261.84 -12.84% 2,506.85 -9.18%
Average: 1.31% 0.63%
Standard deviation: 5.06% 3.13%
Lockheed Martin Corp. (LMT) Standard & Poor’s 500 (S&P 500)
t Date PriceLMT,t1 DividendLMT,t1 RLMT,t2 PriceS&P 500,t RS&P 500,t3
Jan 31, 2014 150.91 1,782.59
1. Feb 28, 2014 162.30 1.33 8.43% 1,859.45 4.31%
2. Mar 31, 2014 163.24 0.58% 1,872.34 0.69%
3. Apr 30, 2014 164.14 0.55% 1,883.95 0.62%
4. May 31, 2014 163.65 1.33 0.51% 1,923.57 2.10%
5. Jun 30, 2014 160.73 -1.78% 1,960.23 1.91%
6. Jul 31, 2014 166.97 3.88% 1,930.67 -1.51%
7. Aug 31, 2014 174.00 1.33 5.01% 2,003.37 3.77%
8. Sep 30, 2014 182.78 5.05% 1,972.29 -1.55%
9. Oct 31, 2014 190.57 4.26% 2,018.05 2.32%
10. Nov 30, 2014 191.56 1.50 1.31% 2,067.56 2.45%
11. Dec 31, 2014 192.57 0.53% 2,058.90 -0.42%
12. Jan 31, 2015 188.37 -2.18% 1,994.99 -3.10%
13. Feb 28, 2015 200.05 1.50 7.00% 2,104.50 5.49%
14. Mar 31, 2015 202.96 1.45% 2,067.89 -1.74%
15. Apr 30, 2015 186.60 -8.06% 2,085.51 0.85%
16. May 31, 2015 188.20 1.50 1.66% 2,107.39 1.05%
17. Jun 30, 2015 185.90 -1.22% 2,063.11 -2.10%
18. Jul 31, 2015 207.10 11.40% 2,103.84 1.97%
19. Aug 31, 2015 201.18 1.50 -2.13% 1,972.18 -6.26%
20. Sep 30, 2015 207.31 3.05% 1,920.03 -2.64%
21. Oct 31, 2015 219.83 6.04% 2,079.36 8.30%
22. Nov 30, 2015 219.16 1.65 0.45% 2,080.41 0.05%
23. Dec 31, 2015 217.15 -0.92% 2,043.94 -1.75%
24. Jan 31, 2016 211.00 -2.83% 1,940.24 -5.07%
25. Feb 29, 2016 215.79 1.65 3.05% 1,932.23 -0.41%
26. Mar 31, 2016 221.50 2.65% 2,059.74 6.60%
27. Apr 30, 2016 232.38 4.91% 2,065.30 0.27%
28. May 31, 2016 236.23 1.65 2.37% 2,096.95 1.53%
29. Jun 30, 2016 248.17 5.05% 2,098.86 0.09%
30. Jul 31, 2016 252.73 1.84% 2,173.60 3.56%
31. Aug 31, 2016 242.97 1.65 -3.21% 2,170.95 -0.12%
32. Sep 30, 2016 239.72 -1.34% 2,168.27 -0.12%
33. Oct 31, 2016 246.38 2.78% 2,126.15 -1.94%
34. Nov 30, 2016 265.25 1.82 8.40% 2,198.81 3.42%
35. Dec 31, 2016 249.94 -5.77% 2,238.83 1.82%
36. Jan 31, 2017 251.33 0.56% 2,278.87 1.79%
37. Feb 28, 2017 266.58 1.82 6.79% 2,363.64 3.72%
38. Mar 31, 2017 267.60 0.38% 2,362.72 -0.04%
39. Apr 30, 2017 269.45 0.69% 2,384.20 0.91%
40. May 31, 2017 281.13 1.82 5.01% 2,411.80 1.16%
41. Jun 30, 2017 277.61 -1.25% 2,423.41 0.48%
42. Jul 31, 2017 292.13 5.23% 2,470.30 1.93%
43. Aug 31, 2017 305.39 1.82 5.16% 2,471.65 0.05%
44. Sep 30, 2017 310.29 1.60% 2,519.36 1.93%
45. Oct 31, 2017 308.16 -0.69% 2,575.26 2.22%
46. Nov 30, 2017 319.12 2.00 4.21% 2,647.58 2.81%
47. Dec 31, 2017 321.05 0.60% 2,673.61 0.98%
48. Jan 31, 2018 354.85 10.53% 2,823.81 5.62%
49. Feb 28, 2018 352.44 2.00 -0.12% 2,713.83 -3.89%
50. Mar 31, 2018 337.93 -4.12% 2,640.87 -2.69%
51. Apr 30, 2018 320.84 -5.06% 2,648.05 0.27%
52. May 31, 2018 314.54 2.00 -1.34% 2,705.27 2.16%
53. Jun 30, 2018 295.43 -6.08% 2,718.37 0.48%
54. Jul 31, 2018 326.10 10.38% 2,816.29 3.60%
55. Aug 31, 2018 320.41 2.00 -1.13% 2,901.52 3.03%
56. Sep 30, 2018 345.96 7.97% 2,913.98 0.43%
57. Oct 31, 2018 293.85 -15.06% 2,711.74 -6.94%
58. Nov 30, 2018 300.43 2.20 2.99% 2,760.17 1.79%
59. Dec 31, 2018 261.84 -12.84% 2,506.85 -9.18%
Average: 1.31% 0.63%
Standard deviation: 5.06% 3.13%

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 LMT 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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VarianceLMT 25.64
VarianceS&P 500 9.77
CovarianceLMT, S&P 500 9.74
Correlation coefficientLMT, S&P 5001 0.62
βLMT2 1.00
αLMT3 0.68

Calculations

1 Correlation coefficientLMT, S&P 500
= CovarianceLMT, S&P 500 ÷ (Standard deviationLMT × Standard deviationS&P 500)
= 9.74 ÷ (5.06 × 3.13)

2 βLMT
= CovarianceLMT, S&P 500 ÷ VarianceS&P 500
= 9.74 ÷ 9.77

3 αLMT
= AverageLMT – βLMT × AverageS&P 500
= 1.311.00 × 0.63


Expected Rate of Return

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.16%
Expected rate of return on market portfolio2 E(RM) 11.49%
Systematic risk (β) of Lockheed Martin Corp.’s common stock βLMT 1.00
 
Expected rate of return on Lockheed Martin Corp.’s common stock3 E(RLMT) 11.46%

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(RLMT) = RF + βLMT [E(RM) – RF]
= 2.16% + 1.00 [11.49%2.16%]
= 11.46%