Capital Asset Pricing Model (CAPM)
Capital asset pricing model (CAPM) indicates what should be the expected or required rate of return on risky assets like Visa Inc. common stock.
Rates of Return
Visa Inc., monthly rates of return
| Visa Inc. (V) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceV,t1 | DividendV,t1 | RV,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Oct 31, 2016 | $82.51 | 2,126.15 | ||||
| 1. | Nov 30, 2016 | $77.32 | $0.165 | -6.09% | 2,198.81 | 3.42% |
| 2. | Dec 31, 2016 | $78.02 | 0.91% | 2,238.83 | 1.82% | |
| 3. | Jan 31, 2017 | $82.71 | 6.01% | 2,278.87 | 1.79% | |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | Aug 31, 2022 | $198.71 | $0.375 | -6.14% | 3,955.00 | -4.24% |
| 71. | Sep 30, 2022 | $177.65 | -10.60% | 3,585.62 | -9.34% | |
| Average (R): | 1.33% | 0.85% | ||||
| Standard deviation: | 6.20% | 4.82% | ||||
| Visa Inc. (V) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceV,t1 | DividendV,t1 | RV,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Oct 31, 2016 | $82.51 | 2,126.15 | ||||
| 1. | Nov 30, 2016 | $77.32 | $0.165 | -6.09% | 2,198.81 | 3.42% |
| 2. | Dec 31, 2016 | $78.02 | 0.91% | 2,238.83 | 1.82% | |
| 3. | Jan 31, 2017 | $82.71 | 6.01% | 2,278.87 | 1.79% | |
| 4. | Feb 28, 2017 | $87.94 | $0.165 | 6.52% | 2,363.64 | 3.72% |
| 5. | Mar 31, 2017 | $88.87 | 1.06% | 2,362.72 | -0.04% | |
| 6. | Apr 30, 2017 | $91.22 | 2.64% | 2,384.20 | 0.91% | |
| 7. | May 31, 2017 | $95.23 | $0.165 | 4.58% | 2,411.80 | 1.16% |
| 8. | Jun 30, 2017 | $93.78 | -1.52% | 2,423.41 | 0.48% | |
| 9. | Jul 31, 2017 | $99.56 | 6.16% | 2,470.30 | 1.93% | |
| 10. | Aug 31, 2017 | $103.52 | $0.165 | 4.14% | 2,471.65 | 0.05% |
| 11. | Sep 30, 2017 | $105.24 | 1.66% | 2,519.36 | 1.93% | |
| 12. | Oct 31, 2017 | $109.98 | 4.50% | 2,575.26 | 2.22% | |
| 13. | Nov 30, 2017 | $112.59 | $0.195 | 2.55% | 2,647.58 | 2.81% |
| 14. | Dec 31, 2017 | $114.02 | 1.27% | 2,673.61 | 0.98% | |
| 15. | Jan 31, 2018 | $124.23 | 8.95% | 2,823.81 | 5.62% | |
| 16. | Feb 28, 2018 | $122.94 | $0.21 | -0.87% | 2,713.83 | -3.89% |
| 17. | Mar 31, 2018 | $119.62 | -2.70% | 2,640.87 | -2.69% | |
| 18. | Apr 30, 2018 | $126.88 | 6.07% | 2,648.05 | 0.27% | |
| 19. | May 31, 2018 | $130.72 | $0.21 | 3.19% | 2,705.27 | 2.16% |
| 20. | Jun 30, 2018 | $132.45 | 1.32% | 2,718.37 | 0.48% | |
| 21. | Jul 31, 2018 | $136.74 | 3.24% | 2,816.29 | 3.60% | |
| 22. | Aug 31, 2018 | $146.89 | $0.21 | 7.58% | 2,901.52 | 3.03% |
| 23. | Sep 30, 2018 | $150.09 | 2.18% | 2,913.98 | 0.43% | |
| 24. | Oct 31, 2018 | $137.85 | -8.16% | 2,711.74 | -6.94% | |
| 25. | Nov 30, 2018 | $141.71 | $0.25 | 2.98% | 2,760.17 | 1.79% |
| 26. | Dec 31, 2018 | $131.94 | -6.89% | 2,506.85 | -9.18% | |
| 27. | Jan 31, 2019 | $135.01 | 2.33% | 2,704.10 | 7.87% | |
| 28. | Feb 28, 2019 | $148.12 | $0.25 | 9.90% | 2,784.49 | 2.97% |
| 29. | Mar 31, 2019 | $156.19 | 5.45% | 2,834.40 | 1.79% | |
| 30. | Apr 30, 2019 | $164.43 | 5.28% | 2,945.83 | 3.93% | |
| 31. | May 31, 2019 | $161.33 | $0.25 | -1.73% | 2,752.06 | -6.58% |
| 32. | Jun 30, 2019 | $173.55 | 7.57% | 2,941.76 | 6.89% | |
| 33. | Jul 31, 2019 | $178.00 | 2.56% | 2,980.38 | 1.31% | |
| 34. | Aug 31, 2019 | $180.82 | $0.25 | 1.72% | 2,926.46 | -1.81% |
| 35. | Sep 30, 2019 | $172.01 | -4.87% | 2,976.74 | 1.72% | |
| 36. | Oct 31, 2019 | $178.86 | 3.98% | 3,037.56 | 2.04% | |
| 37. | Nov 30, 2019 | $184.51 | $0.30 | 3.33% | 3,140.98 | 3.40% |
| 38. | Dec 31, 2019 | $187.90 | 1.84% | 3,230.78 | 2.86% | |
| 39. | Jan 31, 2020 | $198.97 | 5.89% | 3,225.52 | -0.16% | |
| 40. | Feb 29, 2020 | $181.76 | $0.30 | -8.50% | 2,954.22 | -8.41% |
| 41. | Mar 31, 2020 | $161.12 | -11.36% | 2,584.59 | -12.51% | |
| 42. | Apr 30, 2020 | $178.72 | 10.92% | 2,912.43 | 12.68% | |
| 43. | May 31, 2020 | $195.24 | $0.30 | 9.41% | 3,044.31 | 4.53% |
| 44. | Jun 30, 2020 | $193.17 | -1.06% | 3,100.29 | 1.84% | |
| 45. | Jul 31, 2020 | $190.40 | -1.43% | 3,271.12 | 5.51% | |
| 46. | Aug 31, 2020 | $211.99 | $0.30 | 11.50% | 3,500.31 | 7.01% |
| 47. | Sep 30, 2020 | $199.97 | -5.67% | 3,363.00 | -3.92% | |
| 48. | Oct 31, 2020 | $181.71 | -9.13% | 3,269.96 | -2.77% | |
| 49. | Nov 30, 2020 | $210.35 | $0.32 | 15.94% | 3,621.63 | 10.75% |
| 50. | Dec 31, 2020 | $218.73 | 3.98% | 3,756.07 | 3.71% | |
| 51. | Jan 31, 2021 | $193.25 | -11.65% | 3,714.24 | -1.11% | |
| 52. | Feb 28, 2021 | $212.39 | $0.32 | 10.07% | 3,811.15 | 2.61% |
| 53. | Mar 31, 2021 | $211.73 | -0.31% | 3,972.89 | 4.24% | |
| 54. | Apr 30, 2021 | $233.56 | 10.31% | 4,181.17 | 5.24% | |
| 55. | May 31, 2021 | $227.30 | $0.32 | -2.54% | 4,204.11 | 0.55% |
| 56. | Jun 30, 2021 | $233.82 | 2.87% | 4,297.50 | 2.22% | |
| 57. | Jul 31, 2021 | $246.39 | 5.38% | 4,395.26 | 2.27% | |
| 58. | Aug 31, 2021 | $229.10 | $0.32 | -6.89% | 4,522.68 | 2.90% |
| 59. | Sep 30, 2021 | $222.75 | -2.77% | 4,307.54 | -4.76% | |
| 60. | Oct 31, 2021 | $211.77 | -4.93% | 4,605.38 | 6.91% | |
| 61. | Nov 30, 2021 | $193.77 | $0.375 | -8.32% | 4,567.00 | -0.83% |
| 62. | Dec 31, 2021 | $216.71 | 11.84% | 4,766.18 | 4.36% | |
| 63. | Jan 31, 2022 | $226.17 | 4.37% | 4,515.55 | -5.26% | |
| 64. | Feb 28, 2022 | $216.12 | $0.375 | -4.28% | 4,373.94 | -3.14% |
| 65. | Mar 31, 2022 | $221.77 | 2.61% | 4,530.41 | 3.58% | |
| 66. | Apr 30, 2022 | $213.13 | -3.90% | 4,131.93 | -8.80% | |
| 67. | May 31, 2022 | $212.17 | $0.375 | -0.27% | 4,132.15 | 0.01% |
| 68. | Jun 30, 2022 | $196.89 | -7.20% | 3,785.38 | -8.39% | |
| 69. | Jul 31, 2022 | $212.11 | 7.73% | 4,130.29 | 9.11% | |
| 70. | Aug 31, 2022 | $198.71 | $0.375 | -6.14% | 3,955.00 | -4.24% |
| 71. | Sep 30, 2022 | $177.65 | -10.60% | 3,585.62 | -9.34% | |
| Average (R): | 1.33% | 0.85% | ||||
| Standard deviation: | 6.20% | 4.82% | ||||
Show all
1 Data in US$ per share of common stock, adjusted for splits and stock dividends.
2 Rate of return on common stock of V during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Variance and Covariance
Visa Inc., calculation of variance and covariance of returns
| t | Date | RV,t | RS&P 500,t | (RV,t–RV)2 | (RS&P 500,t–RS&P 500)2 | (RV,t–RV)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Nov 30, 2016 | -6.09% | 3.42% | 55.08 | 6.57 | -19.02 |
| 2. | Dec 31, 2016 | 0.91% | 1.82% | 0.18 | 0.93 | -0.41 |
| 3. | Jan 31, 2017 | 6.01% | 1.79% | 21.90 | 0.87 | 4.37 |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 70. | Aug 31, 2022 | -6.14% | -4.24% | 55.83 | 25.99 | 38.10 |
| 71. | Sep 30, 2022 | -10.60% | -9.34% | 142.31 | 103.92 | 121.61 |
| Total (Σ): | 2,687.47 | 1,625.64 | 1,480.15 | |||
| t | Date | RV,t | RS&P 500,t | (RV,t–RV)2 | (RS&P 500,t–RS&P 500)2 | (RV,t–RV)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Nov 30, 2016 | -6.09% | 3.42% | 55.08 | 6.57 | -19.02 |
| 2. | Dec 31, 2016 | 0.91% | 1.82% | 0.18 | 0.93 | -0.41 |
| 3. | Jan 31, 2017 | 6.01% | 1.79% | 21.90 | 0.87 | 4.37 |
| 4. | Feb 28, 2017 | 6.52% | 3.72% | 26.95 | 8.21 | 14.88 |
| 5. | Mar 31, 2017 | 1.06% | -0.04% | 0.07 | 0.80 | 0.24 |
| 6. | Apr 30, 2017 | 2.64% | 0.91% | 1.72 | 0.00 | 0.07 |
| 7. | May 31, 2017 | 4.58% | 1.16% | 10.53 | 0.09 | 0.98 |
| 8. | Jun 30, 2017 | -1.52% | 0.48% | 8.14 | 0.14 | 1.06 |
| 9. | Jul 31, 2017 | 6.16% | 1.93% | 23.35 | 1.17 | 5.22 |
| 10. | Aug 31, 2017 | 4.14% | 0.05% | 7.91 | 0.64 | -2.25 |
| 11. | Sep 30, 2017 | 1.66% | 1.93% | 0.11 | 1.16 | 0.36 |
| 12. | Oct 31, 2017 | 4.50% | 2.22% | 10.07 | 1.86 | 4.33 |
| 13. | Nov 30, 2017 | 2.55% | 2.81% | 1.49 | 3.82 | 2.38 |
| 14. | Dec 31, 2017 | 1.27% | 0.98% | 0.00 | 0.02 | -0.01 |
| 15. | Jan 31, 2018 | 8.95% | 5.62% | 58.12 | 22.69 | 36.31 |
| 16. | Feb 28, 2018 | -0.87% | -3.89% | 4.84 | 22.56 | 10.45 |
| 17. | Mar 31, 2018 | -2.70% | -2.69% | 16.25 | 12.55 | 14.28 |
| 18. | Apr 30, 2018 | 6.07% | 0.27% | 22.45 | 0.34 | -2.76 |
| 19. | May 31, 2018 | 3.19% | 2.16% | 3.46 | 1.71 | 2.43 |
| 20. | Jun 30, 2018 | 1.32% | 0.48% | 0.00 | 0.14 | 0.00 |
| 21. | Jul 31, 2018 | 3.24% | 3.60% | 3.64 | 7.55 | 5.24 |
| 22. | Aug 31, 2018 | 7.58% | 3.03% | 39.00 | 4.72 | 13.56 |
| 23. | Sep 30, 2018 | 2.18% | 0.43% | 0.72 | 0.18 | -0.36 |
| 24. | Oct 31, 2018 | -8.16% | -6.94% | 89.99 | 60.76 | 73.94 |
| 25. | Nov 30, 2018 | 2.98% | 1.79% | 2.72 | 0.87 | 1.54 |
| 26. | Dec 31, 2018 | -6.89% | -9.18% | 67.66 | 100.65 | 82.52 |
| 27. | Jan 31, 2019 | 2.33% | 7.87% | 0.99 | 49.20 | 6.98 |
| 28. | Feb 28, 2019 | 9.90% | 2.97% | 73.35 | 4.49 | 18.14 |
| 29. | Mar 31, 2019 | 5.45% | 1.79% | 16.95 | 0.88 | 3.86 |
| 30. | Apr 30, 2019 | 5.28% | 3.93% | 15.56 | 9.47 | 12.14 |
| 31. | May 31, 2019 | -1.73% | -6.58% | 9.39 | 55.24 | 22.78 |
| 32. | Jun 30, 2019 | 7.57% | 6.89% | 38.98 | 36.46 | 37.70 |
| 33. | Jul 31, 2019 | 2.56% | 1.31% | 1.52 | 0.21 | 0.57 |
| 34. | Aug 31, 2019 | 1.72% | -1.81% | 0.15 | 7.10 | -1.05 |
| 35. | Sep 30, 2019 | -4.87% | 1.72% | 38.48 | 0.75 | -5.36 |
| 36. | Oct 31, 2019 | 3.98% | 2.04% | 7.03 | 1.41 | 3.15 |
| 37. | Nov 30, 2019 | 3.33% | 3.40% | 3.98 | 6.50 | 5.09 |
| 38. | Dec 31, 2019 | 1.84% | 2.86% | 0.26 | 4.02 | 1.01 |
| 39. | Jan 31, 2020 | 5.89% | -0.16% | 20.80 | 1.03 | -4.64 |
| 40. | Feb 29, 2020 | -8.50% | -8.41% | 96.63 | 85.85 | 91.08 |
| 41. | Mar 31, 2020 | -11.36% | -12.51% | 160.95 | 178.66 | 169.58 |
| 42. | Apr 30, 2020 | 10.92% | 12.68% | 92.01 | 139.95 | 113.48 |
| 43. | May 31, 2020 | 9.41% | 4.53% | 65.29 | 13.50 | 29.68 |
| 44. | Jun 30, 2020 | -1.06% | 1.84% | 5.72 | 0.97 | -2.35 |
| 45. | Jul 31, 2020 | -1.43% | 5.51% | 7.65 | 21.67 | -12.87 |
| 46. | Aug 31, 2020 | 11.50% | 7.01% | 103.34 | 37.85 | 62.54 |
| 47. | Sep 30, 2020 | -5.67% | -3.92% | 49.02 | 22.82 | 33.45 |
| 48. | Oct 31, 2020 | -9.13% | -2.77% | 109.46 | 13.11 | 37.89 |
| 49. | Nov 30, 2020 | 15.94% | 10.75% | 213.35 | 98.01 | 144.60 |
| 50. | Dec 31, 2020 | 3.98% | 3.71% | 7.04 | 8.17 | 7.58 |
| 51. | Jan 31, 2021 | -11.65% | -1.11% | 168.48 | 3.87 | 25.55 |
| 52. | Feb 28, 2021 | 10.07% | 2.61% | 76.37 | 3.08 | 15.33 |
| 53. | Mar 31, 2021 | -0.31% | 4.24% | 2.70 | 11.49 | -5.56 |
| 54. | Apr 30, 2021 | 10.31% | 5.24% | 80.63 | 19.25 | 39.40 |
| 55. | May 31, 2021 | -2.54% | 0.55% | 15.01 | 0.09 | 1.19 |
| 56. | Jun 30, 2021 | 2.87% | 2.22% | 2.36 | 1.87 | 2.10 |
| 57. | Jul 31, 2021 | 5.38% | 2.27% | 16.36 | 2.02 | 5.74 |
| 58. | Aug 31, 2021 | -6.89% | 2.90% | 67.54 | 4.18 | -16.80 |
| 59. | Sep 30, 2021 | -2.77% | -4.76% | 16.83 | 31.49 | 23.02 |
| 60. | Oct 31, 2021 | -4.93% | 6.91% | 39.19 | 36.72 | -37.94 |
| 61. | Nov 30, 2021 | -8.32% | -0.83% | 93.20 | 2.85 | 16.29 |
| 62. | Dec 31, 2021 | 11.84% | 4.36% | 110.41 | 12.30 | 36.85 |
| 63. | Jan 31, 2022 | 4.37% | -5.26% | 9.21 | 37.37 | -18.55 |
| 64. | Feb 28, 2022 | -4.28% | -3.14% | 31.46 | 15.92 | 22.38 |
| 65. | Mar 31, 2022 | 2.61% | 3.58% | 1.65 | 7.41 | 3.49 |
| 66. | Apr 30, 2022 | -3.90% | -8.80% | 27.32 | 93.13 | 50.44 |
| 67. | May 31, 2022 | -0.27% | 0.01% | 2.58 | 0.72 | 1.36 |
| 68. | Jun 30, 2022 | -7.20% | -8.39% | 72.81 | 85.50 | 78.90 |
| 69. | Jul 31, 2022 | 7.73% | 9.11% | 40.95 | 68.18 | 52.84 |
| 70. | Aug 31, 2022 | -6.14% | -4.24% | 55.83 | 25.99 | 38.10 |
| 71. | Sep 30, 2022 | -10.60% | -9.34% | 142.31 | 103.92 | 121.61 |
| Total (Σ): | 2,687.47 | 1,625.64 | 1,480.15 | |||
Show all
VarianceV = Σ(RV,t–RV)2 ÷ (71 – 1)
= 2,687.47 ÷ (71 – 1)
= 38.39
VarianceS&P 500 = Σ(RS&P 500,t–RS&P 500)2 ÷ (71 – 1)
= 1,625.64 ÷ (71 – 1)
= 23.22
CovarianceV, S&P 500 = Σ(RV,t–RV)×(RS&P 500,t–RS&P 500) ÷ (71 – 1)
= 1,480.15 ÷ (71 – 1)
= 21.14
Systematic Risk (β) Estimation
| VarianceV | 38.39 |
| VarianceS&P 500 | 23.22 |
| CovarianceV, S&P 500 | 21.14 |
| Correlation coefficientV, S&P 5001 | 0.71 |
| βV2 | 0.91 |
| αV3 | 0.55% |
Calculations
1 Correlation coefficientV, S&P 500
= CovarianceV, S&P 500 ÷ (Standard deviationV × Standard deviationS&P 500)
= 21.14 ÷ (6.20% × 4.82%)
= 0.71
2 βV
= CovarianceV, S&P 500 ÷ VarianceS&P 500
= 21.14 ÷ 23.22
= 0.91
3 αV
= AverageV – βV × AverageS&P 500
= 1.33% – 0.91 × 0.85%
= 0.55%
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 4.67% |
| Expected rate of return on market portfolio2 | E(RM) | 13.79% |
| Systematic risk (β) of Visa Inc. common stock | βV | 0.91 |
| Expected rate of return on Visa Inc. common stock3 | E(RV) | 12.97% |
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).
3 E(RV) = RF + βV [E(RM) – RF]
= 4.67% + 0.91 [13.79% – 4.67%]
= 12.97%