Answer:
a)
The CAPM hypothesis states that the effective market is utilized place in the market and has the maximum eminent expected return of any assortment for a given randomness and the smallest variability for a assumed expected return. By allotment utilized place in the market assortment, you can achieve a standard return,
Thus,
Expected Rate of Return = [Risk free Rate + Beta × (Market Risk - Risk free Rate)]
Beta = [Expected Rate of Return – Risk Free Rate] / [Market Risk - Risk free Rate]
Beta = [12% - 5%] / [10% -5%]
Beta = 7/5
Beta =1.4
The final possible instability while taking the same estimated rate of return as Amazon is $21,000 ($15,000 × 1.4) which indicate that it borrows $6,000 ($21,000 - $15,000). Now the -$6,000 is specified as strength benefit. So the volatility of the asset is,
Volatility = [Volatility of Asset x Beta]
Volatility = [18% × 1.4]
Volatility = 0.252 or 25.20%
Therefore the volatility is less than the volatility of Amazon.
b)
The market share has a instability of "n". The corresponding instability of Amazon will be 2.22 (40%/18%). So the assortment with the most notable predictable give back that has a faint variability from Amazon is $33,333.33 ($15,000x 2.22) which will be the market assortment and it also uses $18,333.33 ($33,333.33 - $15,000). Here the -$18,333.33 is specified as strength asset. So the return is,
Expected Return = [Risk free Rate + Beta × (Market Risk – Risk free Rate)]
Expected Return = [5%+ 122 × (10% - 5%)]
Expected Return = [5%+ 122 × 5%]
Expected Return = [0.05+0.111111]
Expected Return = 0.161111 or1 6.11%
Therefore the volatility is higher than the expected return of Amazon.