Medtronic PLC (NYSE:MDT)

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 Medtronic PLC’s common stock.

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

Rates of Return

Medtronic PLC, monthly rates of return

		Medtronic PLC (MDT)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_MDT,t¹	Dividend_MDT,t¹	R_MDT,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	May 31, 2014	61.03			1,923.57
1.	Jun 30, 2014	63.76		4.47%	1,960.23	1.91%
2.	Jul 31, 2014	61.74	0.305	-2.69%	1,930.67	-1.51%
3.	Aug 31, 2014	63.85		3.42%	2,003.37	3.77%
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70.	Mar 31, 2020	90.18	0.54	-9.88%	2,584.59	-12.51%
71.	Apr 30, 2020	97.63		8.26%	2,912.43	12.68%
Average:				0.97%		0.67%
Standard deviation:				5.19%		4.03%

		Medtronic PLC (MDT)			Standard & Poor’s 500 (S&P 500)
t	Date	Price_MDT,t¹	Dividend_MDT,t¹	R_MDT,t²	Price_{S&P 500,t}	R_{S&P 500,t}³
	May 31, 2014	61.03			1,923.57
1.	Jun 30, 2014	63.76		4.47%	1,960.23	1.91%
2.	Jul 31, 2014	61.74	0.305	-2.69%	1,930.67	-1.51%
3.	Aug 31, 2014	63.85		3.42%	2,003.37	3.77%
4.	Sep 30, 2014	61.95		-2.98%	1,972.29	-1.55%
5.	Oct 31, 2014	68.16	0.305	10.52%	2,018.05	2.32%
6.	Nov 30, 2014	73.87		8.38%	2,067.56	2.45%
7.	Dec 31, 2014	72.20	0.305	-1.85%	2,058.90	-0.42%
8.	Jan 31, 2015	71.40		-1.11%	1,994.99	-3.10%
9.	Feb 28, 2015	77.59		8.67%	2,104.50	5.49%
10.	Mar 31, 2015	77.99	0.305	0.91%	2,067.89	-1.74%
11.	Apr 30, 2015	74.45		-4.54%	2,085.51	0.85%
12.	May 31, 2015	76.32		2.51%	2,107.39	1.05%
13.	Jun 30, 2015	74.10	0.38	-2.41%	2,063.11	-2.10%
14.	Jul 31, 2015	78.39		5.79%	2,103.84	1.97%
15.	Aug 31, 2015	72.29		-7.78%	1,972.18	-6.26%
16.	Sep 30, 2015	66.94	0.38	-6.88%	1,920.03	-2.64%
17.	Oct 31, 2015	73.92		10.43%	2,079.36	8.30%
18.	Nov 30, 2015	75.34		1.92%	2,080.41	0.05%
19.	Dec 31, 2015	76.92	0.38	2.60%	2,043.94	-1.75%
20.	Jan 31, 2016	75.92		-1.30%	1,940.24	-5.07%
21.	Feb 29, 2016	77.39		1.94%	1,932.23	-0.41%
22.	Mar 31, 2016	75.00	0.38	-2.60%	2,059.74	6.60%
23.	Apr 30, 2016	79.15		5.53%	2,065.30	0.27%
24.	May 31, 2016	80.48		1.68%	2,096.95	1.53%
25.	Jun 30, 2016	86.77		7.82%	2,098.86	0.09%
26.	Jul 31, 2016	87.63	0.43	1.49%	2,173.60	3.56%
27.	Aug 31, 2016	87.03		-0.68%	2,170.95	-0.12%
28.	Sep 30, 2016	86.40	0.43	-0.23%	2,168.27	-0.12%
29.	Oct 31, 2016	82.02		-5.07%	2,126.15	-1.94%
30.	Nov 30, 2016	73.01		-10.99%	2,198.81	3.42%
31.	Dec 31, 2016	71.23	0.43	-1.85%	2,238.83	1.82%
32.	Jan 31, 2017	76.02		6.72%	2,278.87	1.79%
33.	Feb 28, 2017	80.91		6.43%	2,363.64	3.72%
34.	Mar 31, 2017	80.56	0.43	0.10%	2,362.72	-0.04%
35.	Apr 30, 2017	83.09		3.14%	2,384.20	0.91%
36.	May 31, 2017	84.28		1.43%	2,411.80	1.16%
37.	Jun 30, 2017	88.75		5.30%	2,423.41	0.48%
38.	Jul 31, 2017	83.97	0.46	-4.87%	2,470.30	1.93%
39.	Aug 31, 2017	80.62		-3.99%	2,471.65	0.05%
40.	Sep 30, 2017	77.77	0.46	-2.96%	2,519.36	1.93%
41.	Oct 31, 2017	80.52		3.54%	2,575.26	2.22%
42.	Nov 30, 2017	82.13		2.00%	2,647.58	2.81%
43.	Dec 31, 2017	80.75	0.46	-1.12%	2,673.61	0.98%
44.	Jan 31, 2018	85.89		6.37%	2,823.81	5.62%
45.	Feb 28, 2018	79.89		-6.99%	2,713.83	-3.89%
46.	Mar 31, 2018	80.22	0.46	0.99%	2,640.87	-2.69%
47.	Apr 30, 2018	80.13		-0.11%	2,648.05	0.27%
48.	May 31, 2018	86.32		7.72%	2,705.27	2.16%
49.	Jun 30, 2018	85.61		-0.82%	2,718.37	0.48%
50.	Jul 31, 2018	90.23	0.50	5.98%	2,816.29	3.60%
51.	Aug 31, 2018	96.41		6.85%	2,901.52	3.03%
52.	Sep 30, 2018	98.37	0.50	2.55%	2,913.98	0.43%
53.	Oct 31, 2018	89.82		-8.69%	2,711.74	-6.94%
54.	Nov 30, 2018	97.53		8.58%	2,760.17	1.79%
55.	Dec 31, 2018	90.96	0.50	-6.22%	2,506.85	-9.18%
56.	Jan 31, 2019	88.39		-2.83%	2,704.10	7.87%
57.	Feb 28, 2019	90.50		2.39%	2,784.49	2.97%
58.	Mar 31, 2019	91.08	0.50	1.19%	2,834.40	1.79%
59.	Apr 30, 2019	88.81		-2.49%	2,945.83	3.93%
60.	May 31, 2019	92.58		4.25%	2,752.06	-6.58%
61.	Jun 30, 2019	97.39		5.20%	2,941.76	6.89%
62.	Jul 31, 2019	101.94	0.54	5.23%	2,980.38	1.31%
63.	Aug 31, 2019	107.89		5.84%	2,926.46	-1.81%
64.	Sep 30, 2019	108.62	0.54	1.18%	2,976.74	1.72%
65.	Oct 31, 2019	108.90		0.26%	3,037.56	2.04%
66.	Nov 30, 2019	111.39		2.29%	3,140.98	3.40%
67.	Dec 31, 2019	113.45	0.54	2.33%	3,230.78	2.86%
68.	Jan 31, 2020	115.44		1.75%	3,225.52	-0.16%
69.	Feb 29, 2020	100.67		-12.79%	2,954.22	-8.41%
70.	Mar 31, 2020	90.18	0.54	-9.88%	2,584.59	-12.51%
71.	Apr 30, 2020	97.63		8.26%	2,912.43	12.68%
Average:				0.97%		0.67%
Standard deviation:				5.19%		4.03%

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 MDT during period t

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

Systematic Risk (β) Estimation

Variance_MDT	26.96
Variance_{S&P 500}	16.21
Covariance_{MDT, S&P 500}	11.97
Correlation coefficient_{MDT, S&P 500}¹	0.57
β_MDT²	0.74
α_MDT³	0.48

Calculations

¹ Correlation coefficient_{MDT, S&P 500}
= Covariance_{MDT, S&P 500} ÷ (Standard deviation_MDT × Standard deviation_{S&P 500})
= 11.97 ÷ (5.19 × 4.03)

² β_MDT
= Covariance_{MDT, S&P 500} ÷ Variance_{S&P 500}
= 11.97 ÷ 16.21

³ α_MDT
= Average_MDT – β_MDT × Average_{S&P 500}
= 0.97 – 0.74 × 0.67

Expected Rate of Return

Assumptions
Rate of return on LT Treasury Composite¹	R_F	1.22%
Expected rate of return on market portfolio²	E(R_M)	12.07%
Systematic risk (β) of Medtronic PLC’s common stock	β_MDT	0.74

Expected rate of return on Medtronic PLC’s common stock³	E(R_MDT)	9.24%

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_MDT) = R_F + β_MDT [E(R_M) – R_F]
= 1.22% + 0.74 [12.07% – 1.22%]
= 9.24%