Beta Coefficient Assignment Instructions
Using Yahoo! Finance find the value of beta for Comcast. Write a two page paper discussing the following items:
- What is the estimated beta coefficient of Comcast? What does this beta mean in terms of your choice to include this company in your overall portfolio?
- Given the beta of Comcast, 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’.
- 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.
Comcast Beta Coefficient
The estimated Comcast beta coefficient is 1.03411 (Yahoo Finance, 2016). Beta refers to a measure of the systemic risk or volatility of a portfolio or security compared to the entire market. Beta is considered as the tendency for returns on security to respond to market swing. A beta of below 1 indicates that the security will be less volatile compared to the market, a beta of 1 indicates that the price of the security will be shift with the market, while a beta of more than 1 demonstrates that the price of the security will be extra volatile compared to the market. The Comcast Company has an estimated beta of 1.03 which is slightly above 1 and thus, it can be said to indicate that the price of the security will be more volatile as compared to the market prices. The security shift may be 3% higher than the market value. This company will be included in my portfolio since its rate volatility may be highly beneficial especially if the shift is on the positive side (Investopedia, 201b).
Cost of Equity Computation using CAPM
Cost of equity refers to the return which stakeholders need for their investment in a firm. It is the compensation which is demanded by the market in exchange for possessing the asset and taking the ownership risk. It acts as the weighted average cost of capital integral part that is extensively used to establish the total expected cost of all capital under various financing. In this regard the Comcast shareholders will be anticipating a return of 4.44% percent on the investment they make in the Comcast Company.
Other Selected Companies
The two other selected companies include the Apple Inc. Company and the Ford Motor Company. The beta value for Ford Motor Company is 1.39 while that for Apple Inc. Company is 1.36. In case 1/3 of my investment is put in each of the three companies, the beta portfolio will be: 1/3 *1.03+ 1/3*1.39 +1/3*1.36
= 0.343 + 0.463 + 0.453
Provided with the data above the rate of return will be provided using this formula:
Risk free rate =6.5%, beta = 1.26 and market return rate =4.5%
In this regard the anticipated return will be:
= 6.5% + 1.26(4.5% – 6.5%)
= 6.5% + 1.26(-2%)
= 6.5% -2.52%
The anticipated return after diversification is slightly lower the anticipated returns if the entire investment was done in Comcast. However the risk of losing the investment is considerably low. Diversification assists in reducing risks which affect only one corporation and not the entire market. It is basically done to ensure that the investor does not suffer total loss in case a single corporation that investor has entrusted with his or her investment experiences crisis. In this case, the three companies belong to different industries but they are all found in the US market. This increases the portfolio diversification and ensures that the investor can only suffer losses if the entire US market is affected by any risk. The US based market risks can also be reduced by investing one of the portfolio in a different economy for instance in a company based in Europe or Asia to ensure that any undiversifiable risk in US does not increase the risk of total loss since some investments will be outside that economy.
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