UsingYahoo! Finance find
the value of beta for your reference company. Write a two page paper discussing
the following items:
1.
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?
2.
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’.
3.
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.
