Lowe’s Cos. Inc. (NYSE:LOW)

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 Lowe’s Cos. Inc.’s common stock.

Rates of Return
Systematic Risk (β) Estimation
Expected Rate of Return

Rates of Return

Lowe’s Cos. Inc., monthly rates of return

		Lowe’s Cos. Inc. (LOW)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_LOW,t¹	Dividend_LOW,t¹	R_LOW,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Feb 28, 2014	50.03			1,859.45
1.	Mar 31, 2014	48.90		-2.26%	1,872.34	0.69%
2.	Apr 30, 2014	45.91	0.18	-5.75%	1,883.95	0.62%
3.	May 31, 2014	47.08		2.55%	1,923.57	2.10%
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70.	Dec 31, 2019	119.76		2.09%	3,230.78	2.86%
71.	Jan 31, 2020	116.24	0.55	-2.48%	3,225.52	-0.16%
Average:				1.57%		0.83%
Standard deviation:				6.65%		3.24%

		Lowe’s Cos. Inc. (LOW)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_LOW,t¹	Dividend_LOW,t¹	R_LOW,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	Feb 28, 2014	50.03			1,859.45
1.	Mar 31, 2014	48.90		-2.26%	1,872.34	0.69%
2.	Apr 30, 2014	45.91	0.18	-5.75%	1,883.95	0.62%
3.	May 31, 2014	47.08		2.55%	1,923.57	2.10%
4.	Jun 30, 2014	47.99		1.93%	1,960.23	1.91%
5.	Jul 31, 2014	47.85	0.23	0.19%	1,930.67	-1.51%
6.	Aug 31, 2014	52.51		9.74%	2,003.37	3.77%
7.	Sep 30, 2014	52.92		0.78%	1,972.29	-1.55%
8.	Oct 31, 2014	57.20	0.23	8.52%	2,018.05	2.32%
9.	Nov 30, 2014	63.83		11.59%	2,067.56	2.45%
10.	Dec 31, 2014	68.80		7.79%	2,058.90	-0.42%
11.	Jan 31, 2015	67.76	0.23	-1.18%	1,994.99	-3.10%
12.	Feb 28, 2015	74.09		9.34%	2,104.50	5.49%
13.	Mar 31, 2015	74.39		0.40%	2,067.89	-1.74%
14.	Apr 30, 2015	68.86	0.23	-7.12%	2,085.51	0.85%
15.	May 31, 2015	69.98		1.63%	2,107.39	1.05%
16.	Jun 30, 2015	66.97		-4.30%	2,063.11	-2.10%
17.	Jul 31, 2015	69.36	0.28	3.99%	2,103.84	1.97%
18.	Aug 31, 2015	69.17		-0.27%	1,972.18	-6.26%
19.	Sep 30, 2015	68.92		-0.36%	1,920.03	-2.64%
20.	Oct 31, 2015	73.83	0.28	7.53%	2,079.36	8.30%
21.	Nov 30, 2015	76.60		3.75%	2,080.41	0.05%
22.	Dec 31, 2015	76.04		-0.73%	2,043.94	-1.75%
23.	Jan 31, 2016	71.66	0.28	-5.39%	1,940.24	-5.07%
24.	Feb 29, 2016	67.53		-5.76%	1,932.23	-0.41%
25.	Mar 31, 2016	75.75		12.17%	2,059.74	6.60%
26.	Apr 30, 2016	76.02	0.28	0.73%	2,065.30	0.27%
27.	May 31, 2016	80.13		5.41%	2,096.95	1.53%
28.	Jun 30, 2016	79.17		-1.20%	2,098.86	0.09%
29.	Jul 31, 2016	82.28	0.35	4.37%	2,173.60	3.56%
30.	Aug 31, 2016	76.56		-6.95%	2,170.95	-0.12%
31.	Sep 30, 2016	72.21		-5.68%	2,168.27	-0.12%
32.	Oct 31, 2016	66.65	0.35	-7.22%	2,126.15	-1.94%
33.	Nov 30, 2016	70.55		5.85%	2,198.81	3.42%
34.	Dec 31, 2016	71.12		0.81%	2,238.83	1.82%
35.	Jan 31, 2017	73.08	0.35	3.25%	2,278.87	1.79%
36.	Feb 28, 2017	74.37		1.77%	2,363.64	3.72%
37.	Mar 31, 2017	82.21		10.54%	2,362.72	-0.04%
38.	Apr 30, 2017	84.88	0.35	3.67%	2,384.20	0.91%
39.	May 31, 2017	78.77		-7.20%	2,411.80	1.16%
40.	Jun 30, 2017	77.53		-1.57%	2,423.41	0.48%
41.	Jul 31, 2017	77.40	0.41	0.36%	2,470.30	1.93%
42.	Aug 31, 2017	73.89		-4.53%	2,471.65	0.05%
43.	Sep 30, 2017	79.94		8.19%	2,519.36	1.93%
44.	Oct 31, 2017	79.95	0.41	0.53%	2,575.26	2.22%
45.	Nov 30, 2017	83.37		4.28%	2,647.58	2.81%
46.	Dec 31, 2017	92.94		11.48%	2,673.61	0.98%
47.	Jan 31, 2018	104.73	0.41	13.13%	2,823.81	5.62%
48.	Feb 28, 2018	89.59		-14.46%	2,713.83	-3.89%
49.	Mar 31, 2018	87.75		-2.05%	2,640.87	-2.69%
50.	Apr 30, 2018	82.43	0.41	-5.60%	2,648.05	0.27%
51.	May 31, 2018	95.01		15.26%	2,705.27	2.16%
52.	Jun 30, 2018	95.57		0.59%	2,718.37	0.48%
53.	Jul 31, 2018	99.34	0.48	4.45%	2,816.29	3.60%
54.	Aug 31, 2018	108.75		9.47%	2,901.52	3.03%
55.	Sep 30, 2018	114.82		5.58%	2,913.98	0.43%
56.	Oct 31, 2018	95.22	0.48	-16.65%	2,711.74	-6.94%
57.	Nov 30, 2018	94.37		-0.89%	2,760.17	1.79%
58.	Dec 31, 2018	92.36		-2.13%	2,506.85	-9.18%
59.	Jan 31, 2019	96.16	0.48	4.63%	2,704.10	7.87%
60.	Feb 28, 2019	105.09		9.29%	2,784.49	2.97%
61.	Mar 31, 2019	109.47		4.17%	2,834.40	1.79%
62.	Apr 30, 2019	113.14	0.48	3.79%	2,945.83	3.93%
63.	May 31, 2019	93.28		-17.55%	2,752.06	-6.58%
64.	Jun 30, 2019	100.91		8.18%	2,941.76	6.89%
65.	Jul 31, 2019	101.40	0.55	1.03%	2,980.38	1.31%
66.	Aug 31, 2019	112.20		10.65%	2,926.46	-1.81%
67.	Sep 30, 2019	109.96		-2.00%	2,976.74	1.72%
68.	Oct 31, 2019	111.61	0.55	2.00%	3,037.56	2.04%
69.	Nov 30, 2019	117.31		5.11%	3,140.98	3.40%
70.	Dec 31, 2019	119.76		2.09%	3,230.78	2.86%
71.	Jan 31, 2020	116.24	0.55	-2.48%	3,225.52	-0.16%
Average:				1.57%		0.83%
Standard deviation:				6.65%		3.24%

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 LOW during period t

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

Systematic Risk (β) Estimation

Variance_LOW	44.16
Variance_{S&P 500}	10.49
Covariance_{LOW, S&P 500}	13.65
Correlation coefficient_{LOW, S&P 500}¹	0.63
β_LOW²	1.30
α_LOW³	0.49

Calculations

¹ Correlation coefficient_{LOW, S&P 500}
= Covariance_{LOW, S&P 500} ÷ (Standard deviation_LOW × Standard deviation_{S&P 500})
= 13.65 ÷ (6.65 × 3.24)

² β_LOW
= Covariance_{LOW, S&P 500} ÷ Variance_{S&P 500}
= 13.65 ÷ 10.49

³ α_LOW
= Average_LOW – β_LOW × Average_{S&P 500}
= 1.57 – 1.30 × 0.83

Expected Rate of Return

Assumptions
Rate of return on LT Treasury Composite¹	R_F	1.23%
Expected rate of return on market portfolio²	E(R_M)	12.05%
Systematic risk (β) of Lowe’s Cos. Inc.’s common stock	β_LOW	1.30

Expected rate of return on Lowe’s Cos. Inc.’s common stock³	E(R_LOW)	15.31%

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(R_LOW) = R_F + β_LOW [E(R_M) – R_F]
= 1.23% + 1.30 [12.05% – 1.23%]
= 15.31%