Capital Asset Pricing Model: A Renewed Application on S&P 500 Index

Abstract

This study employs the Capital Asset Pricing Model (CAPM) to analyze the risk-return relationship of a diversified portfolio of nine companies from technology, finance, and health sectors within the S&P 500 index sourced from Yahoo Finance. Utilizing daily stock returns data from January 01, 2019, to December 31, 2023, we estimate beta coefficients and expected returns for each company, shedding light on their performance and risk characteristics. Our findings reveal that technology and finance sector stocks generally exhibit higher beta values and expected returns compared to healthcare sector stocks. Notably, NVIDIA Corporation emerges as the most volatile stock with the highest expected return of 23.095%, reflecting its position in the innovation-driven technology sector. Conversely, healthcare sector stocks demonstrate lower beta values and expected returns. Through an in-depth analysis, we underscore the importance of balancing risk and return in portfolio construction, considering investors’ risk tolerance and objectives. While acknowledging the limitations of CAPM, our study contributes to a deeper understanding of its applicability in portfolio management and asset pricing, providing valuable insights for investors and financial practitioners.