Investment Analysis questions

Question

You did some valuation work on Amazon Stock and determined that the stock is fairly priced. You estimated the Expected Return to be 12.65%. The 10-year US Treasury securities yield is 5.5%, and the stock beta is 1.2.

What is the market risk premium?

a. 10.91%

b. 12.00%

c. 6.50%

d. 12.65%

Answer 1

You can use the Capital Asset Pricing Model (CAPM) formula to solve for this

CAPM = Risk-Free Rate + Beta * (Market Risk Premium)

Market risk premium = Expected Return - Risk-Free Rate

The prompt gives you the expected return for Amazon, it's 12.65%, it also gives you the risk free rate, its 5.5% being the 10-year US treasury security yield mentioned in the prompt. In most cases the 10-year US T-bill is always used to serve as the risk free rate.

12.65% - 5.5% = 7.15%

I don't see the correct response listed, it's only asking to solve for the market risk premium, so the beta is not needed for this calculation.