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 Waste Management Inc. common stock.
Rates of Return
Waste Management Inc., monthly rates of return
| Waste Management Inc. (WM) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceWM,t1 | DividendWM,t1 | RWM,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jan 31, 2017 | $69.50 | 2,278.87 | ||||
| 1. | Feb 28, 2017 | $73.32 | 5.50% | 2,363.64 | 3.72% | |
| 2. | Mar 31, 2017 | $72.92 | $0.425 | 0.03% | 2,362.72 | -0.04% |
| 3. | Apr 30, 2017 | $72.78 | -0.19% | 2,384.20 | 0.91% | |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 58. | Nov 30, 2021 | $160.67 | 0.27% | 4,567.00 | -0.83% | |
| 59. | Dec 31, 2021 | $166.90 | $0.575 | 4.24% | 4,766.18 | 4.36% |
| Average (R): | 1.79% | 1.36% | ||||
| Standard deviation: | 4.98% | 4.48% | ||||
| Waste Management Inc. (WM) | Standard & Poor’s 500 (S&P 500) | |||||
|---|---|---|---|---|---|---|
| t | Date | PriceWM,t1 | DividendWM,t1 | RWM,t2 | PriceS&P 500,t | RS&P 500,t3 |
| Jan 31, 2017 | $69.50 | 2,278.87 | ||||
| 1. | Feb 28, 2017 | $73.32 | 5.50% | 2,363.64 | 3.72% | |
| 2. | Mar 31, 2017 | $72.92 | $0.425 | 0.03% | 2,362.72 | -0.04% |
| 3. | Apr 30, 2017 | $72.78 | -0.19% | 2,384.20 | 0.91% | |
| 4. | May 31, 2017 | $72.91 | 0.18% | 2,411.80 | 1.16% | |
| 5. | Jun 30, 2017 | $73.35 | $0.425 | 1.19% | 2,423.41 | 0.48% |
| 6. | Jul 31, 2017 | $75.15 | 2.45% | 2,470.30 | 1.93% | |
| 7. | Aug 31, 2017 | $77.11 | 2.61% | 2,471.65 | 0.05% | |
| 8. | Sep 30, 2017 | $78.27 | $0.425 | 2.06% | 2,519.36 | 1.93% |
| 9. | Oct 31, 2017 | $82.17 | 4.98% | 2,575.26 | 2.22% | |
| 10. | Nov 30, 2017 | $82.25 | $0.425 | 0.61% | 2,647.58 | 2.81% |
| 11. | Dec 31, 2017 | $86.30 | 4.92% | 2,673.61 | 0.98% | |
| 12. | Jan 31, 2018 | $88.43 | 2.47% | 2,823.81 | 5.62% | |
| 13. | Feb 28, 2018 | $86.32 | -2.39% | 2,713.83 | -3.89% | |
| 14. | Mar 31, 2018 | $84.12 | $0.465 | -2.01% | 2,640.87 | -2.69% |
| 15. | Apr 30, 2018 | $81.29 | -3.36% | 2,648.05 | 0.27% | |
| 16. | May 31, 2018 | $82.71 | 1.75% | 2,705.27 | 2.16% | |
| 17. | Jun 30, 2018 | $81.34 | $0.465 | -1.09% | 2,718.37 | 0.48% |
| 18. | Jul 31, 2018 | $90.00 | 10.65% | 2,816.29 | 3.60% | |
| 19. | Aug 31, 2018 | $90.90 | 1.00% | 2,901.52 | 3.03% | |
| 20. | Sep 30, 2018 | $90.36 | $0.465 | -0.08% | 2,913.98 | 0.43% |
| 21. | Oct 31, 2018 | $89.47 | -0.98% | 2,711.74 | -6.94% | |
| 22. | Nov 30, 2018 | $93.75 | $0.465 | 5.30% | 2,760.17 | 1.79% |
| 23. | Dec 31, 2018 | $88.99 | -5.08% | 2,506.85 | -9.18% | |
| 24. | Jan 31, 2019 | $95.67 | 7.51% | 2,704.10 | 7.87% | |
| 25. | Feb 28, 2019 | $101.25 | 5.83% | 2,784.49 | 2.97% | |
| 26. | Mar 31, 2019 | $103.91 | $0.5125 | 3.13% | 2,834.40 | 1.79% |
| 27. | Apr 30, 2019 | $107.34 | 3.30% | 2,945.83 | 3.93% | |
| 28. | May 31, 2019 | $109.35 | 1.87% | 2,752.06 | -6.58% | |
| 29. | Jun 30, 2019 | $115.37 | $0.5125 | 5.97% | 2,941.76 | 6.89% |
| 30. | Jul 31, 2019 | $117.00 | 1.41% | 2,980.38 | 1.31% | |
| 31. | Aug 31, 2019 | $119.35 | 2.01% | 2,926.46 | -1.81% | |
| 32. | Sep 30, 2019 | $115.00 | $0.5125 | -3.22% | 2,976.74 | 1.72% |
| 33. | Oct 31, 2019 | $112.21 | -2.43% | 3,037.56 | 2.04% | |
| 34. | Nov 30, 2019 | $112.91 | 0.62% | 3,140.98 | 3.40% | |
| 35. | Dec 31, 2019 | $113.96 | $0.5125 | 1.38% | 3,230.78 | 2.86% |
| 36. | Jan 31, 2020 | $121.70 | 6.79% | 3,225.52 | -0.16% | |
| 37. | Feb 29, 2020 | $110.81 | -8.95% | 2,954.22 | -8.41% | |
| 38. | Mar 31, 2020 | $92.56 | $0.545 | -15.98% | 2,584.59 | -12.51% |
| 39. | Apr 30, 2020 | $100.02 | 8.06% | 2,912.43 | 12.68% | |
| 40. | May 31, 2020 | $106.75 | 6.73% | 3,044.31 | 4.53% | |
| 41. | Jun 30, 2020 | $105.91 | $0.545 | -0.28% | 3,100.29 | 1.84% |
| 42. | Jul 31, 2020 | $109.60 | 3.48% | 3,271.12 | 5.51% | |
| 43. | Aug 31, 2020 | $114.00 | 4.01% | 3,500.31 | 7.01% | |
| 44. | Sep 30, 2020 | $113.17 | $0.545 | -0.25% | 3,363.00 | -3.92% |
| 45. | Oct 31, 2020 | $107.91 | -4.65% | 3,269.96 | -2.77% | |
| 46. | Nov 30, 2020 | $119.13 | 10.40% | 3,621.63 | 10.75% | |
| 47. | Dec 31, 2020 | $117.93 | $0.545 | -0.55% | 3,756.07 | 3.71% |
| 48. | Jan 31, 2021 | $111.32 | -5.61% | 3,714.24 | -1.11% | |
| 49. | Feb 28, 2021 | $110.89 | -0.39% | 3,811.15 | 2.61% | |
| 50. | Mar 31, 2021 | $129.02 | $0.575 | 16.87% | 3,972.89 | 4.24% |
| 51. | Apr 30, 2021 | $137.97 | 6.94% | 4,181.17 | 5.24% | |
| 52. | May 31, 2021 | $140.68 | 1.96% | 4,204.11 | 0.55% | |
| 53. | Jun 30, 2021 | $140.11 | $0.575 | 0.00% | 4,297.50 | 2.22% |
| 54. | Jul 31, 2021 | $148.26 | 5.82% | 4,395.26 | 2.27% | |
| 55. | Aug 31, 2021 | $155.11 | 4.62% | 4,522.68 | 2.90% | |
| 56. | Sep 30, 2021 | $149.36 | $0.575 | -3.34% | 4,307.54 | -4.76% |
| 57. | Oct 31, 2021 | $160.23 | 7.28% | 4,605.38 | 6.91% | |
| 58. | Nov 30, 2021 | $160.67 | 0.27% | 4,567.00 | -0.83% | |
| 59. | Dec 31, 2021 | $166.90 | $0.575 | 4.24% | 4,766.18 | 4.36% |
| Average (R): | 1.79% | 1.36% | ||||
| Standard deviation: | 4.98% | 4.48% | ||||
Show all
1 Data in US$ per share of common stock, adjusted for splits and stock dividends.
2 Rate of return on common stock of WM during period t
3 Rate of return on S&P 500 (the market portfolio proxy) during period t
Variance and Covariance
Waste Management Inc., calculation of variance and covariance of returns
| t | Date | RWM,t | RS&P 500,t | (RWM,t–RWM)2 | (RS&P 500,t–RS&P 500)2 | (RWM,t–RWM)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Feb 28, 2017 | 5.50% | 3.72% | 13.76 | 5.58 | 8.76 |
| 2. | Mar 31, 2017 | 0.03% | -0.04% | 3.07 | 1.95 | 2.45 |
| 3. | Apr 30, 2017 | -0.19% | 0.91% | 3.91 | 0.20 | 0.89 |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| . | . | . | . | . | . | . |
| 58. | Nov 30, 2021 | 0.27% | -0.83% | 2.29 | 4.80 | 3.31 |
| 59. | Dec 31, 2021 | 4.24% | 4.36% | 6.00 | 9.02 | 7.35 |
| Total (Σ): | 1,440.81 | 1,164.17 | 959.75 | |||
| t | Date | RWM,t | RS&P 500,t | (RWM,t–RWM)2 | (RS&P 500,t–RS&P 500)2 | (RWM,t–RWM)×(RS&P 500,t–RS&P 500) |
|---|---|---|---|---|---|---|
| 1. | Feb 28, 2017 | 5.50% | 3.72% | 13.76 | 5.58 | 8.76 |
| 2. | Mar 31, 2017 | 0.03% | -0.04% | 3.07 | 1.95 | 2.45 |
| 3. | Apr 30, 2017 | -0.19% | 0.91% | 3.91 | 0.20 | 0.89 |
| 4. | May 31, 2017 | 0.18% | 1.16% | 2.59 | 0.04 | 0.32 |
| 5. | Jun 30, 2017 | 1.19% | 0.48% | 0.36 | 0.77 | 0.53 |
| 6. | Jul 31, 2017 | 2.45% | 1.93% | 0.45 | 0.33 | 0.39 |
| 7. | Aug 31, 2017 | 2.61% | 0.05% | 0.67 | 1.70 | -1.07 |
| 8. | Sep 30, 2017 | 2.06% | 1.93% | 0.07 | 0.33 | 0.15 |
| 9. | Oct 31, 2017 | 4.98% | 2.22% | 10.22 | 0.74 | 2.75 |
| 10. | Nov 30, 2017 | 0.61% | 2.81% | 1.37 | 2.10 | -1.70 |
| 11. | Dec 31, 2017 | 4.92% | 0.98% | 9.84 | 0.14 | -1.18 |
| 12. | Jan 31, 2018 | 2.47% | 5.62% | 0.46 | 18.15 | 2.90 |
| 13. | Feb 28, 2018 | -2.39% | -3.89% | 17.41 | 27.59 | 21.92 |
| 14. | Mar 31, 2018 | -2.01% | -2.69% | 14.41 | 16.37 | 15.36 |
| 15. | Apr 30, 2018 | -3.36% | 0.27% | 26.53 | 1.18 | 5.59 |
| 16. | May 31, 2018 | 1.75% | 2.16% | 0.00 | 0.64 | -0.03 |
| 17. | Jun 30, 2018 | -1.09% | 0.48% | 8.30 | 0.76 | 2.52 |
| 18. | Jul 31, 2018 | 10.65% | 3.60% | 78.50 | 5.04 | 19.88 |
| 19. | Aug 31, 2018 | 1.00% | 3.03% | 0.62 | 2.78 | -1.31 |
| 20. | Sep 30, 2018 | -0.08% | 0.43% | 3.49 | 0.86 | 1.74 |
| 21. | Oct 31, 2018 | -0.98% | -6.94% | 7.68 | 68.86 | 23.00 |
| 22. | Nov 30, 2018 | 5.30% | 1.79% | 12.37 | 0.18 | 1.51 |
| 23. | Dec 31, 2018 | -5.08% | -9.18% | 47.11 | 111.00 | 72.32 |
| 24. | Jan 31, 2019 | 7.51% | 7.87% | 32.72 | 42.39 | 37.24 |
| 25. | Feb 28, 2019 | 5.83% | 2.97% | 16.37 | 2.61 | 6.53 |
| 26. | Mar 31, 2019 | 3.13% | 1.79% | 1.81 | 0.19 | 0.59 |
| 27. | Apr 30, 2019 | 3.30% | 3.93% | 2.29 | 6.62 | 3.90 |
| 28. | May 31, 2019 | 1.87% | -6.58% | 0.01 | 62.97 | -0.68 |
| 29. | Jun 30, 2019 | 5.97% | 6.89% | 17.53 | 30.64 | 23.18 |
| 30. | Jul 31, 2019 | 1.41% | 1.31% | 0.14 | 0.00 | 0.02 |
| 31. | Aug 31, 2019 | 2.01% | -1.81% | 0.05 | 10.03 | -0.70 |
| 32. | Sep 30, 2019 | -3.22% | 1.72% | 25.02 | 0.13 | -1.80 |
| 33. | Oct 31, 2019 | -2.43% | 2.04% | 17.75 | 0.47 | -2.89 |
| 34. | Nov 30, 2019 | 0.62% | 3.40% | 1.35 | 4.19 | -2.38 |
| 35. | Dec 31, 2019 | 1.38% | 2.86% | 0.16 | 2.25 | -0.60 |
| 36. | Jan 31, 2020 | 6.79% | -0.16% | 25.05 | 2.31 | -7.61 |
| 37. | Feb 29, 2020 | -8.95% | -8.41% | 115.24 | 95.43 | 104.87 |
| 38. | Mar 31, 2020 | -15.98% | -12.51% | 315.58 | 192.37 | 246.39 |
| 39. | Apr 30, 2020 | 8.06% | 12.68% | 39.35 | 128.29 | 71.05 |
| 40. | May 31, 2020 | 6.73% | 4.53% | 24.42 | 10.05 | 15.67 |
| 41. | Jun 30, 2020 | -0.28% | 1.84% | 4.26 | 0.23 | -0.99 |
| 42. | Jul 31, 2020 | 3.48% | 5.51% | 2.88 | 17.24 | 7.05 |
| 43. | Aug 31, 2020 | 4.01% | 7.01% | 4.96 | 31.91 | 12.58 |
| 44. | Sep 30, 2020 | -0.25% | -3.92% | 4.15 | 27.89 | 10.75 |
| 45. | Oct 31, 2020 | -4.65% | -2.77% | 41.40 | 17.01 | 26.54 |
| 46. | Nov 30, 2020 | 10.40% | 10.75% | 74.15 | 88.30 | 80.91 |
| 47. | Dec 31, 2020 | -0.55% | 3.71% | 5.46 | 5.54 | -5.50 |
| 48. | Jan 31, 2021 | -5.61% | -1.11% | 54.64 | 6.11 | 18.27 |
| 49. | Feb 28, 2021 | -0.39% | 2.61% | 4.72 | 1.57 | -2.72 |
| 50. | Mar 31, 2021 | 16.87% | 4.24% | 227.45 | 8.33 | 43.52 |
| 51. | Apr 30, 2021 | 6.94% | 5.24% | 26.53 | 15.09 | 20.01 |
| 52. | May 31, 2021 | 1.96% | 0.55% | 0.03 | 0.65 | -0.14 |
| 53. | Jun 30, 2021 | 0.00% | 2.22% | 3.18 | 0.75 | -1.54 |
| 54. | Jul 31, 2021 | 5.82% | 2.27% | 16.24 | 0.84 | 3.70 |
| 55. | Aug 31, 2021 | 4.62% | 2.90% | 8.03 | 2.38 | 4.37 |
| 56. | Sep 30, 2021 | -3.34% | -4.76% | 26.24 | 37.39 | 31.33 |
| 57. | Oct 31, 2021 | 7.28% | 6.91% | 30.15 | 30.87 | 30.51 |
| 58. | Nov 30, 2021 | 0.27% | -0.83% | 2.29 | 4.80 | 3.31 |
| 59. | Dec 31, 2021 | 4.24% | 4.36% | 6.00 | 9.02 | 7.35 |
| Total (Σ): | 1,440.81 | 1,164.17 | 959.75 | |||
Show all
VarianceWM = Σ(RWM,t–RWM)2 ÷ (59 – 1)
= 1,440.81 ÷ (59 – 1)
= 24.84
VarianceS&P 500 = Σ(RS&P 500,t–RS&P 500)2 ÷ (59 – 1)
= 1,164.17 ÷ (59 – 1)
= 20.07
CovarianceWM, S&P 500 = Σ(RWM,t–RWM)×(RS&P 500,t–RS&P 500) ÷ (59 – 1)
= 959.75 ÷ (59 – 1)
= 16.55
Systematic Risk (β) Estimation
| VarianceWM | 24.84 |
| VarianceS&P 500 | 20.07 |
| CovarianceWM, S&P 500 | 16.55 |
| Correlation coefficientWM, S&P 5001 | 0.74 |
| βWM2 | 0.82 |
| αWM3 | 0.67% |
Calculations
1 Correlation coefficientWM, S&P 500
= CovarianceWM, S&P 500 ÷ (Standard deviationWM × Standard deviationS&P 500)
= 16.55 ÷ (4.98% × 4.48%)
= 0.74
2 βWM
= CovarianceWM, S&P 500 ÷ VarianceS&P 500
= 16.55 ÷ 20.07
= 0.82
3 αWM
= AverageWM – βWM × AverageS&P 500
= 1.79% – 0.82 × 1.36%
= 0.67%
Expected Rate of Return
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 4.68% |
| Expected rate of return on market portfolio2 | E(RM) | 13.78% |
| Systematic risk (β) of Waste Management Inc. common stock | βWM | 0.82 |
| Expected rate of return on Waste Management Inc. common stock3 | E(RWM) | 12.19% |
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(RWM) = RF + βWM [E(RM) – RF]
= 4.68% + 0.82 [13.78% – 4.68%]
= 12.19%