Using Yahoo! Finance find the value of beta for your reference company. Write a two page paper discussing the following items:
is the estimated beta coefficient of your company? What does this beta
mean in terms of your choice to include this company in your overall
- Given the beta of your company, the present yield to
maturity on U.S. government bonds maturing in one year (currently about
4.5% annually) and an assessment that the market risk premium (that is –
the difference between the expected rate of return on the ‘market
portfolio’ and the risk-free rate of interest) is 6.5%, use the CAPM
equation in order to find out what is the present ‘cost of equity’ of
your company? Explain what is the meaning of the ‘cost of equity’.
two other companies, look up their “Beta” and report the names of these
companies and their betas. Suppose you invest one third of your money
in each of the stocks of these companies. What will the beta of the
portfolio be? Given the data in (b), what will the Expected Rate of
Return on this portfolio be? Do you feel that the three-stock portfolio
is sufficiently diversified or does it still have risk that can be
diversified away? Explain.
In a two-page report explain your
answers thoroughly with references to the background materials. Make
sure to demonstrate a strong understanding of the concept of beta and
the risk/return trade off.