3. Using the CAPM and the internet, Estimate the required rate of return of the

Question

3. Using the CAPM and the internet, Estimate the required rate of return of the Amazon Company. Use the 10 year Treasury bond rate (yield) for the risk free rate and the Russell 2000 for the market rate. You can find this numbers on finance.yahoo.com, morningstar or other financial websites. Reference which website you used. Remember that the formula is r = rf + B (return on the market - rf)

Russell 2000 market info can be found at http://news.morningstar.com/index/indexReturn.html

Use the 3 year rate on the Russell 2000 TR.

The yield for the 10 year US Treasury bond can be found at http://finance.yahoo.com/market-overview/

Using the same website, put the stock symbol or try to find the company by spelling it out under quote and find the beta on the right side (a little way down the page). You don't have to quote the beta like in the risk and return chapter, just use the beta from the website.

Now you can compute your required rate of return. Please show your work. Discuss your findings.

Explanation / Answer

Russell TR 3 years total return = 6.90%

rate on 10 years US treasury bonds = 1.59%

company symbol :Alphabet Inc. (GOOG)

beta = 1.032

required return = r = rf + B

r = 1.59 + (6.90-1.59)*1/032 =7.069%

As required rate of return is greater than market return as well company beta value is also greater than market beta value of one so it is riskier but returns are also greater than market return so it is a good security for investment

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