Beta analysis Name: Institution: Course: Date: Beta Analysis My company choice is the coca cola company. It has a beta coefficient of 0.66 as at 21st April 4 pm. In general beta coefficient is a sensitivity measure of a share regarding price to the movements in market price (Amihud 2002). It can also be regarded as the security market line slope. If a company has a beta coefficient of 1 it would mean that the company’s stock has equal risks to those in the overall market and its earnings will and in the event of gaining by the same assets there is more gain compared to an individual who only invested in the risk-free assets. The companies with lesser betas act as shock absorbers in times of losses in the companies with bigger and riskier betas (Di Iorio & Faff 2015). Reference Amihud Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of financial markets 5(1) 31-56. Di Iorio A. & Faff R. W. (2015). The effect of intervaling on the foreign exchange exposure of Australian stock returns. [...]
Using Yahoo! Finance find the value of beta for your reference company. Write a two page paper discussing the following items: A. What 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 portfolio? B. 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'. C. Choose 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. SLP Assignment Expectations 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.