Question

suppose the beta of amazon is 2.2, the risk-free rate is 5.5 percent, and the market risk premium is 8 percent. calculate the expected rate of return for amazon. this could also be one way to calculate the cost of equity.

Answer 1

The expected rate of return for Amazon using the CAPM formula is 23.1%. This value is also indicative of Amazon's cost of equity, reflecting the required return by investors.

Step-by-step explanation:

The expected rate of return for Amazon, given a beta of 2.2, a risk-free rate of 5.5 percent, and a market risk premium of 8 percent, can be calculated using the Capital Asset Pricing Model (CAPM). The CAPM formula is:

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

Plugging in the values:

Expected Return = 5.5% + (2.2 * 8%)

Expected Return = 5.5% + 17.6%

Expected Return = 23.1%

This calculation is also one way to determine Amazon's cost of equity, which is the return required by investors to compensate for the risk of investing in the stock.