Question

Can anyone assist me in interpreting this CAPM Model for Ford Motor Co. ?

I'm trying to understand what I should highlight in a discussion of the results and the conclusion that can be drawn from those results.

As per my textbook, the discussion holds 20 marks, while the conclusion is worth 10 marks.

The relevant information is shown below.

tes of Retu 36. Jan 31, 2016 11.94 37. Feb 29, 2016 12.51 33. Mar 31, 2016 13.50 12.4290|1940.24 |-5.07% 4.77% | 1,932.23 |-04190 7.9196 2,059.74 6.606 1.56% | 2,065.30 | 0.27% -0.52% | 2,096 95 | 1.53% 6.826 2.093.86 0.096 1.9196 | 2,173.60 | 3.56% -0.47% 12,170.95 |-0.12% Ford Motor Co., monthly rates of return Ford Motor Co., monthly rates of return 40 31, 2016 13.49 41. Jun 30, 2016 12.57 42. Jul 31, 2016 12.66 31, 2016 12.60 Ford Motor Co. (F) Standard & Poor's 500 Price(F, t Dividend(F,R(F,t) Price(S&P RS&P 500, t) 45.Oct 31,2016 11.74 2.63% | 1,514.68 | 1.11% 4.289 11,569.19 | 3.60% 4.26% | 1,597.57 | 1.81% 15. 109.011.630.74 | 2.08% 1.34% | 1,606.28 |-1.50% 9.76% | 1,685.73 | 4.95% -4.0996 1.63297 |-3.13% 4.20% | 1,681.55 | 2.97% 2.02% 1.756.54 14.46% -0.18% 1,805.81 12.80% 9.66% | 1,848.36 | 2.36% 2.24% 1.782.39 1.3.5696 1.876 2,193.81 3.426 1.4296 | 2,238.83 | 1.82% 2. Mar 31, 2013 13.15 47. Dec 31, 2016 12.13 30, 2013 13.71 4. May 31, 2013 15.63 5. Jun 30, 2013 15.47 6. Jul 31, 201316.83 49. Feb 28, 2017 12.53 50. Mar 31, 201711.64 30, 2017 11.47 7.1090 |2,362.72 -0.17% 12.384.20 |-0.04% | 0.9196 9. 9. Oct 31, 2013 17.11 10. Nov 30, 2013 17.0S 1 Dec 31, 2013 1543 12. Jan 31, 2014 14.96 13. Feb 28, 201415.39 14. Mar 31, 2014 15.60 53 Jun 30, 2017 11.19 54. Jul 31, 2017 11.22 0.63% | 2,423 41 1.6196 12470.30 1.69%|2471.65 | 0 48% | 1.93% | 0.05% 1.93% | 2.2296 | 2 81% 30, 2017 11.97 57. Oct 31, 2017 12.27 3.7696 2.04% | 2.57526 | 2647 58 1.36% 1.872.34 10.69% 4.33% 1.883.95 10.62% 1.30% | 1,923.57 | 2.10% 4.37% 11.950.23 11.91% -0.5596 |1930.67 |-1.51% 2.29% 2.003.37 13.77% 15.05% 1.972.29 3.89% 12,018.05 | 2.32% 11.64%| 2,067.56 | 2.45% 1.46% 2,038.90 1.0.4296 -4.13% | 1,994.99 |-3.10% 11.08% 2.104.50 15.49% 1.22% 12,067.89 |-1.74% 1.18%|2085.51 | 0.85% 3.99% 2.107.39 11.05% 1.05% 12,063.11 |-2.10% -0.20% 2.103.84 11.97% -6.4796 1.972.18 | -6.26% -2.16% | 1,920.03 |-2.64% 10.24% 2.079.36 18.30% 3.24% 2,080.41 10.05% 1.67% 2.043.94 1.1.7596 59. Dec 31, 2017 12.49 Av Standard Deviation 30, 201416.15 0.45% 16. May 31, 2014 16.44 2.71% 18. Jul 31,201417.02 19 20 21. Oct 31, 2014 14.09 22. Nov 30, 2014 15.73 23. Dec 31, 2014 13.30 (1) Data in USD $ per share of common stock, adjusted for splits and stock dividends. (2) Rate ofreturn on common stock ofF during period t (3) Rate of return on S&P 500 (the market portfolio proxy) during period t 30, 201414.79 1.556 Jan 31. 201514.71 25. Feb 23, 201516.34 26. Mar 31, 2015 16.14 28. May 31, 2015 1.17 29. Jun 30, 2015 15.01 30. Ju1 31, 2015 14.83 31. Aug 31,2015 13.87 32 33. Oct 31, 2015 14.81 0.151 35. Dec 31, 2015 14.09

Answer 1

The CAPM (Capital Asset Pricing Model) helps us in calculating the expected return on a particular stock based on the beta coefficient of the stock. The beta coefficient measures the systematic risk in the overall market and does not consider the unsystematic or the firm specific risk.

As the the CAPM equation, the expected return of the stock (Re) is calculated as

Re = Rf + beta *(Rm - Rf)

where Rf is the expected risk free rate which is the most recent treasury bill rate which is risk free

Beta is the measure of systematic risk and

Rm is average return of the broad market or index

For the Ford motor Inc,

We can see that the beta or systematic risk coefficient = 1.31

Rm = market return is assumed to be 12.43% and

risk free rate (Rf) is assumed to be 2.97%

So, as per the CAPM equation, the Expected return Re is

Re = Rf + beta*(Rm-Rf)

Re = 2.97 + 1.31*(12.43-2.97)

Re = 15.36%