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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 Walt Disney Co.’s common stock.
Rates of Return
Walt Disney Co., monthly rates of return
| Walt Disney Co. (DIS) | Standard & Poor’s 500 (S&P 500) | |||||
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| t | Date | PriceDIS,t1 | DividendDIS,t1 | RDIS,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Oct 31, 2012 | |
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| 1. | Nov 30, 2012 | |
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| 2. | Dec 31, 2012 | |
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| 3. | Jan 31, 2013 | |
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| 70. | Aug 31, 2018 | |
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| 71. | Sep 30, 2018 | |
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| Average: | |
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| Standard Deviation: | |
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| Walt Disney Co. (DIS) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceDIS,t1 | DividendDIS,t1 | RDIS,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Oct 31, 2012 | |
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| 1. | Nov 30, 2012 | |
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| 2. | Dec 31, 2012 | |
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| 3. | Jan 31, 2013 | |
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| 4. | Feb 28, 2013 | |
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| 5. | Mar 31, 2013 | |
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| 6. | Apr 30, 2013 | |
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| 7. | May 31, 2013 | |
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| 8. | Jun 30, 2013 | |
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| 9. | Jul 31, 2013 | |
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| 10. | Aug 31, 2013 | |
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| 11. | Sep 30, 2013 | |
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| 12. | Oct 31, 2013 | |
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| 13. | Nov 30, 2013 | |
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| 14. | Dec 31, 2013 | |
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| 15. | Jan 31, 2014 | |
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| 16. | Feb 28, 2014 | |
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| 17. | Mar 31, 2014 | |
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| 18. | Apr 30, 2014 | |
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| 19. | May 31, 2014 | |
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| 20. | Jun 30, 2014 | |
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| 21. | Jul 31, 2014 | |
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| 22. | Aug 31, 2014 | |
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| 23. | Sep 30, 2014 | |
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| 24. | Oct 31, 2014 | |
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| 25. | Nov 30, 2014 | |
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| 26. | Dec 31, 2014 | |
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| 27. | Jan 31, 2015 | |
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| 28. | Feb 28, 2015 | |
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| 29. | Mar 31, 2015 | |
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| 30. | Apr 30, 2015 | |
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| 31. | May 31, 2015 | |
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| 32. | Jun 30, 2015 | |
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| 33. | Jul 31, 2015 | |
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| 34. | Aug 31, 2015 | |
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| 35. | Sep 30, 2015 | |
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| 36. | Oct 31, 2015 | |
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| 37. | Nov 30, 2015 | |
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| 38. | Dec 31, 2015 | |
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| 39. | Jan 31, 2016 | |
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| 40. | Feb 29, 2016 | |
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| 41. | Mar 31, 2016 | |
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| 42. | Apr 30, 2016 | |
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| 43. | May 31, 2016 | |
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| 44. | Jun 30, 2016 | |
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| 45. | Jul 31, 2016 | |
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| 46. | Aug 31, 2016 | |
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| 47. | Sep 30, 2016 | |
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| 48. | Oct 31, 2016 | |
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| 49. | Nov 30, 2016 | |
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| 50. | Dec 31, 2016 | |
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| 51. | Jan 31, 2017 | |
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| 52. | Feb 28, 2017 | |
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| 53. | Mar 31, 2017 | |
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| 54. | Apr 30, 2017 | |
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| 55. | May 31, 2017 | |
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| 56. | Jun 30, 2017 | |
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| 57. | Jul 31, 2017 | |
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| 58. | Aug 31, 2017 | |
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| 59. | Sep 30, 2017 | |
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| 60. | Oct 31, 2017 | |
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| 61. | Nov 30, 2017 | |
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| 62. | Dec 31, 2017 | |
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| 63. | Jan 31, 2018 | |
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| 64. | Feb 28, 2018 | |
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| 65. | Mar 31, 2018 | |
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| 66. | Apr 30, 2018 | |
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| 67. | May 31, 2018 | |
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| 68. | Jun 30, 2018 | |
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| 69. | Jul 31, 2018 | |
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| 70. | Aug 31, 2018 | |
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| 71. | Sep 30, 2018 | |
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| Average: | |
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| Standard Deviation: | |
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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 DIS during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Systematic Risk (β) Estimation
| VarianceDIS | |
| VarianceS&P 500 | |
| CovarianceDIS, S&P 500 | |
| Correlation CoefficientDIS, S&P 5001 | |
| βDIS2 | |
| αDIS3 | |
Calculations
1 CovarianceDIS, S&P 500 ÷ (Standard DeviationDIS × Standard DeviationS&P 500)
= ÷ ( × )
2 CovarianceDIS, S&P 500 ÷ VarianceS&P 500
= ÷
3 AverageDIS – βDIS × AverageS&P 500
= – ×
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | |
| Expected rate of return on market portfolio2 | E(RM) | |
| Systematic risk (β) of Walt Disney Co.’s common stock | βDIS | |
| Expected rate of return on Walt Disney Co.’s common stock3 | E(RDIS) | |
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
3 E(RDIS) = RF + βDIS [E(RM) – RF]
= + [ – ]
=