Discuss whether the two companies betas are what you would expect. Be sure to explain why or why not. Calculate the returns based on the CAPM model. Be sure to state your assumptions.
Stock (Ticker Symbol) |
Value Line |
Yahoo! Finance |
---|---|---|
Amazon.com (AMZN) |
1.1 |
1.41 |
Apple (AAPL) |
0.9 |
0.96 |
Because most of the textbook tells us that generally, beta lie between 0.4 to 1.6, I expect that these two companies beta is right.
Company | Data |
Amazon | |
Amazon.com's beta | 1.1 |
Risk-Free rate | 2.96% |
Market Return Premium | 7% |
Expected rate of return for Amazon | 10.66% |
Apple | |
Apple's Beta | 0.9 |
Risk-Free rate | 2.96% |
Market Return Premium | 7% |
Expected rate of return for Amazon | 9.26% |
Note:
1. Current yield on a US. 10-year treasury was 2.96% as of 2018. Therefore, I am taking it as risk-free rate.
2. The average excess historical annual return for the US stocks was 7% as of 2018. Therefore, I am taking it as a market return premium.
3. Expected rate of return = Risk-free rate + (Beta x Market Return Premium)
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