Question
In: Finance
Below you find the monthly closing prices for SP500 and Amazon for 2 years 01.01.2018 ...
Below you find the monthly closing prices for SP500 and Amazon for 2 years
| 01.01.2018 | 2'823.81 | 1'450.89 |
| 01.02.2018 | 2'713.83 | 1'512.45 |
| 01.03.2018 | 2'640.87 | 1'447.34 |
| 01.04.2018 | 2'648.05 | 1'566.13 |
| 01.05.2018 | 2'705.27 | 1'629.62 |
| 01.06.2018 | 2'718.37 | 1'699.80 |
| 01.07.2018 | 2'816.29 | 1'777.44 |
| 01.08.2018 | 2'901.52 | 2'012.71 |
| 01.09.2018 | 2'913.98 | 2'003.00 |
| 01.10.2018 | 2'711.74 | 1'598.01 |
| 01.11.2018 | 2'760.17 | 1'690.17 |
| 01.12.2018 | 2'506.85 | 1'501.97 |
| 01.01.2019 | 2'704.10 | 1'718.73 |
| 01.02.2019 | 2'784.49 | 1'639.83 |
| 01.03.2019 | 2'834.40 | 1'780.75 |
| 01.04.2019 | 2'945.83 | 1'926.52 |
| 01.05.2019 | 2'752.06 | 1'775.07 |
| 01.06.2019 | 2'941.76 | 1'893.63 |
| 01.07.2019 | 2'980.38 | 1'866.78 |
| 01.08.2019 | 2'926.46 | 1'776.29 |
| 01.09.2019 | 2'976.74 | 1'735.91 |
| 01.10.2019 | 3'037.56 | 1'776.66 |
| 01.11.2019 | 3'140.98 | 1'800.80 |
| 01.12.2019 | 3'230.78 | 1'847.84 |
- Convert the monthly closing prices to returns
- estimate beta with using a market risk premium 5.4%.
- Use a current Risk-free rate from the market for your calculations and specify which instrument (type and maturity) you use.
Solutions
Expert Solution
The return table looks like this
| Month | S&P 500 | S&P Monthly Returns | Amazon | Amazon Monthly Returns |
| 01.01.2018 | 2,823.81 | 1,450.89 | ||
| 01.02.2018 | 2,713.83 | -3.89% | 1,512.45 | 4.24% |
| 01.03.2018 | 2,640.87 | -2.69% | 1,447.34 | -4.30% |
| 01.04.2018 | 2,648.05 | 0.27% | 1,566.13 | 8.21% |
| 01.05.2018 | 2,705.27 | 2.16% | 1,629.62 | 4.05% |
| 01.06.2018 | 2,718.37 | 0.48% | 1,699.80 | 4.31% |
| 01.07.2018 | 2,816.29 | 3.60% | 1,777.44 | 4.57% |
| 01.08.2018 | 2,901.52 | 3.03% | 2,012.71 | 13.24% |
| 01.09.2018 | 2,913.98 | 0.43% | 2,003.00 | -0.48% |
| 01.10.2018 | 2,711.74 | -6.94% | 1,598.01 | -20.22% |
| 01.11.2018 | 2,760.17 | 1.79% | 1,690.17 | 5.77% |
| 01.12.2018 | 2,506.85 | -9.18% | 1,501.97 | -11.13% |
| 01.01.2019 | 2,704.10 | 7.87% | 1,718.73 | 14.43% |
| 01.02.2019 | 2,784.49 | 2.97% | 1,639.83 | -4.59% |
| 01.03.2019 | 2,834.40 | 1.79% | 1,780.75 | 8.59% |
| 01.04.2019 | 2,945.83 | 3.93% | 1,926.52 | 8.19% |
| 01.05.2019 | 2,752.06 | -6.58% | 1,775.07 | -7.86% |
| 01.06.2019 | 2,941.76 | 6.89% | 1,893.63 | 6.68% |
| 01.07.2019 | 2,980.38 | 1.31% | 1,866.78 | -1.42% |
| 01.08.2019 | 2,926.46 | -1.81% | 1,776.29 | -4.85% |
| 01.09.2019 | 2,976.74 | 1.72% | 1,735.91 | -2.27% |
| 01.10.2019 | 3,037.56 | 2.04% | 1,776.66 | 2.35% |
| 01.11.2019 | 3,140.98 | 3.40% | 1,800.80 | 1.36% |
| 01.12.2019 | 3,230.78 | 2.86% | 1,847.84 | 2.61% |
| Avg Monthly Return | 0.67% | 1.37% | ||
| Annual Return (Monthly Return x12) | 8.07% | 16.41% |
Cost of Equity Re = Rf + Beta x Market risk premium
Where:
Re = Cost of Equity
Rf = Risk free rate
Risk premium = (Market Return - Risk Free rate)
Prevailing 10 year treasury rate in US = 0.70% (Risk Free Rate)
Market Return = 8.07% (Annual return of S&P 500)
Return on Amazon = 16.41%
Cost of Equity Re = Rf + Beta x Market risk premium**
Using the above values
16.41% = 0.70% + Beta x (8.07% - 0.70%)
Beta of Amazon
= (16.41% - 0.70%) / 7.37%
= 15.71% / 7.37%
= 2.13
** Since we have already calculated the market return (S&P 500 return = 8.07%), we should not use the 5.40% market risk premium. We can derive market risk premium = 8.07% - 0.70% = 7.37%
jeff jeffy answered 1 year agoRelated Solutions
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AMZN
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February
174.89
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March
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April
201.13
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May
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June
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July
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August
210.31
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September
218.15
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October
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November
194.09
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IBM
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177.44
$
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February
178.49
627.44
March
196.51
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April
213.10
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May
190.45
501.98
June
210.47
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July
239.81
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August
199.24
535.11
September
222.47
511.66
October
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The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple...
The table below shows the closing monthly stock prices for IBM
and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
181.04
$
627.91
February
180.89
633.92
March
204.07
559.97
April
221.08
551.70
May
187.57
489.50
June
213.23
483.58
July
247.79
609.39
August
191.86
532.41
September
225.35
510.10
October
215.79
611.83
November
200.84
582.86...
The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple...
The table below shows the closing monthly stock prices for IBM
and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
180.44
$
626.46
February
180.49
632.84
March
202.81
561.38
April
219.75
551.30
May
188.05
491.58
June
212.77
484.78
July
246.46
609.09
August
193.09
532.86
September
224.87
510.36
October
215.67
610.82
November
200.39
583.73...
The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple...
The table below shows the closing monthly stock prices for IBM
and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
170.24
$
601.81
February
173.69
614.48
March
181.39
585.35
April
197.14
544.50
May
196.21
526.94
June
204.95
505.18
July
223.85
603.99
August
214.00
540.51
September
216.71
514.78
October
213.63
593.65
November
192.74
598.52...
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and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
181.04
$
627.91
February
180.89
633.92
March
204.07
559.97
April
221.08
551.70
May
187.57
489.50
June
213.23
483.58
July
247.79
609.39
August
191.86
532.41
September
225.35
510.10
October
215.79
611.83
November
200.84
582.86...
The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the exponential...
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and Amazon. Calculate the exponential three-month moving average
for both stocks where two-thirds of the average weight is placed on
the most recent price. (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
IBM
AMZN
January
$
172.64
$
607.61
February
175.29
618.80
March
186.43
579.71
April
202.46
546.10
May
194.29
518.62
June
206.79
500.38
July
229.17
605.19
August
209.08
538.71
September
218.63
513.74
October
214.11...
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and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
172.64
$
607.61
February
175.29
618.80
March
186.43
579.71
April
202.46
546.10
May
194.29
518.62
June
206.79
500.38
July
229.17
605.19
August
209.08
538.71
September
218.63
513.74
October
214.11
597.69
November
194.54
595.04...
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and Amazon. Calculate the exponential three-month moving average
for both stocks where two-thirds of the average weight is placed on
the most recent price. (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
IBM
AMZN
January
$
172.64
$
607.61
February
175.29
618.80
March
186.43
579.71
April
202.46
546.10
May
194.29
518.62
June
206.79
500.38
July
229.17
605.19
August
209.08
538.71
September
218.63
513.74
October
214.11...
The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple...
The table below shows the closing monthly stock prices for IBM
and Amazon. Calculate the simple three-month moving average for
each month for both companies. (Input all amounts as
positive values. Do not round intermediate calculations. Round your
answers to 2 decimal places.)
IBM
AMZN
January
$
178.64
$
622.11
February
179.29
629.60
March
199.03
565.61
April
215.76
550.10
May
189.49
497.82
June
211.39
488.38
July
242.47
608.19
August
196.78
534.21
September
223.43
511.14
October
215.31
607.79
November
199.04
586.34...
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