...Beta Definition Beta coefficient is a measure of systematic risk and volatility of an investment portfolio or security. The coefficient is then compared to that of the whole market. It is arrived at by using regression analysis where the value represents how an investment’s return responds to market fluctuations. (Richard Loth, 2007) Application Going by Beta’s definition, a market has a standard beta of 1. Individual securities and portfolios are then measured based on how much they deviate from the market given beta value of 1. A portfolio with a beta of 1.0 shows that the price of the investment is moving in tandem with that of the market. When the beta is below 1.0, it indicates that the investment is less volatile than that of the market. If greater than 1.0, it indicates that the price of the investment is more volatile than the market price. For instance, a portfolio with a beta of 1.3, basically means that it is 30% more volatile than the market price. Investors that are conservative and keen in preserving capital should therefore focus on securities and portfolios with low betas. On the other hand, if the investor is out for risk with higher returns, they should focus on investments with high betas. Advantages Beta has a couple of advantages especially in the role that it plays in Capital Asset Pricing Model assessment of risk. It is easy to work with beta since it gives a clear and quantifiable measure. As a result of its efficiency, it is commonly used in...
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...401(k) Beta The following report will evaluate and compare the systematic risk of the stocks within a 401(k) investment portfolio. The time period for which the stocks in this investment portfolio have been analyzed is January 1, 2004 through December 31, 2014. Each stock has had a beta test and corresponding regression analysis performed. A portfolio-wide beta test has also been completed to make further detailed conclusions. The beta of each stock will be compared to that of its standard. Any observations made from the betas will also be reported. The below table represents the stock breakdown of the 401(k) investment portfolio. The portfolio consists of twelve stocks, representing seven of the major industry categories. Six of the twelve stocks come from the consumer goods industry, with half being cyclical and the other half being non-cyclical. The remaining industry categories included in this portfolio are two from industrials and one of each from the following categories: energy, telecommunications, technology, and healthcare. A further analysis shows that 60% of the portfolio is made up of consumer goods, while the remaining percents are as follows: 15% energy, 10% industrials, 5% telecommunications, 5% technology, and 5% healthcare. The below table represents the portfolio beta and the beta for the individual stocks within the portfolio. The total beta represents the portfolio beta amount for each stock as of the weighted percentage. The below beta analysis for...
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...Question 1 For 4 Dow Jones stocks for a 15 year period, compute quarterly realized betas from daily data. Find firm specific and macroeconomic variables that help explain quarterly beta. Answer 1.1 Factors Introduction Factor model survey the sensitivity of a stock return as a function of one or more factors. There are single-factor and multi-factor models. In factors model, based on the type of factors used, it can be classified to economic and fundamental factor models. Economic factor models use macroeconomic and financial markets variables as factors, while fundamental factor models use firm-specific microeconomic variables, such as financial indicators. In recent research shows that the change in macroeconomic factors could be reflected in the change of systematic risk which impacts a stock’s expected return (Humpe & Macmillan 2007). Macroeconomic factors included industry production index, CPI, GDP, unemployment rate, inflation rate, risk premium, default premium, business cycle index and so on. From Chen (1986) notable study which uses variables include industrial production, inflation, risk premium, term structure, market index, consumption and oil prices to found out that industrial production, unanticipated change in the risk premium, unanticipated inflation, and, a slightly weaker, the unanticipated change in term structure, are the most important factors affecting expected stock returns. The 15 macroeconomic variables used as factors in our model are...
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...PAWEL BILINSKI AND DANIELLE LYSSIMACHOU b1 The Risk Interpretation of the CAPM’s Beta: Evidence from a New Research Method This study tests the validity of using the CAPM beta as a risk control in cross-sectional accounting and finance research. We recognize that high risk stocks should experience either very good or very bad returns more frequently compared to low risk stocks, i.e. high risk stocks should cluster in the tails of the cross-sectional return distribution. Building on this intuition, we test the risk interpretation of the CAPM’s beta by examining if high beta stocks are more likely than low beta stocks to experience either very high or very low returns. Our empirical results indicate that beta is a strong predictor of large positive and large negative returns, which confirms that beta is a valid empirical risk measure and that researchers should use beta as a risk control in empirical tests. Further, we show that because the relation between beta and returns is U-shaped, i.e. high betas predict both very high and very low returns, linear cross-sectional regression models, e.g. Fama-MacBeth regressions, will fail on average to reject the null hypothesis that beta does not capture risk. This result explains why previous studies find no significant cross-sectional relation between beta and returns. Key words: Market beta; New research method; Empirical accounting and finance research. PAWEL BILINSKI (pawel.bilinski.1@city.ac.uk) and DANIELLE LYSSIMACHOU...
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...Beta (finance) From Wikipedia, the free encyclopedia Jump to: navigation, search In finance, the Beta (β) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.[1] An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.[2] It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. Contents[hide] * 1 Definition * 1.1 Security market line * 2 Choice of benchmark * 3 Investing * 4 Academic theory * 5 Multiple beta model * 6 Estimation of beta * 7 Extreme and interesting cases * 8 Criticism...
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...warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task for students is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need for students to estimate a segment WACC draws out their abilities to critique different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft and the defense business. Thus, deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing’s overall corporate WACC. In doing so,...
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...model applies Beta (non-diversifiable risk) to link risks and returns of investments. According to Stahl (2016), Beta is a standard for measuring the systematic risk or the non-diversifiable risk. The uncertainty in the economy of a particular country causes the systematic risk. Systematic risk is that risk sharing or risk diversification cannot reduce. Economic downturns, war, natural calamities and a change of government policy are some of the activities that cause systematic risk. Both CAPM and Beta are measures of risk (Anon 2014). The capital assets pricing model defines the required rate of return of security. CAPM can be a mathematical equation, or a graphical representation is known as the security market line (SML) (Stahl 2015). An analysis of CAPM indicates that there are several critiques of this model. Nevertheless, there are multivariate models used to overcome these critiques. A).Formulas to Calculate CAPM and Beta 1). Capital Assets Pricing Model CAPM= [pic]= [pic]+ [pic] (RM-RF) Where; [pic] is the cutoff rate or even minimum required rate of return RM- RF is the risk premium and is above free rate RM is the market returns [pic] is the risk-free rate of returns [pic] is the beta of asset j Illustration Assuming that [pic]= 1.2, RM= 12% and [pic]= 4%. Use the CAPM to calculate the required rate of return. Solution CAPM= [pic]= [pic]+ [pic] (RM-RF) [pic]= 4+1.2 (12-4) [pic]= 4+ (1.2 x 8) [pic]= 4 + 9.6 [pic]= 13.6 % 2). Beta [pic]= [pic] ...
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...pROJECT ON FINANCIAL MANAGEMENT | ESTIMATION OF BETA AND ITS INTERPRETATION IN AN INVESTMENT DECISION | Submitted to: | Prof. S P Mohapatra | | | Submitted By: Aditya Prakash (11DM061) Amitava Mitra (11DM062) Paritosh Beuria (11DM063) Subhajyoti Bhattacharya (11DM064) INSTITUTE OF MANAGEMENT & INFORMATION SCIENCE, BHUBANESWAR. | CONTENTS Page No. * OBJECTIVES 3 * COMPANY PROFILES 4 i. Mahindra Finance ii. Unitech Ltd. * PROJECT METHODOLOGY AND ANALYSIS 5 * Objectives of the project * Scope of the project * Concepts * Excel Analysis * Computational Aspects * INTERPRETATION AND CONCLUSION 11 * REFERENCES 11 OBJECTIVES * To select the stocks of two companies from different sectors to invest. * To determine the beta value for each of the stocks for last financial year on the basis of National Stock Exchange (NSE) and interpretation of beta. * To determine a minimum risk portfolio by using the two stocks. Company Profiles Mahindra Finance Mahindra & Mahindra Financial Services Limited is one of the leading non-banking finance companies in India. It is among the top 500 Indian companies by market capitalization. For the fiscal ended 31 March 2011...
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...To: Janet Mortensen, CFO From: Senior Financial Analyst Division Date: October 7, 2013 Re: Midland Energy Resources Inc. Weighted Average Cost of Capital Midland Energy Resources Inc. is a publicly traded company that primarily deals in the energy industry. The company itself is divided into three major operational divisions, two of which that is concerning to the company include: Oil and Gas Exploration and Production (E&P) and Refining and Marketing (R&M). The Petrochemicals division will not be addressed. Going forward, Midland Energy would like to undertake various development projects and property acquisitions, and the profitability of such endeavors must be evaluated. To do so, both the single corporate and the two division WACCs must be calculated. Management team at Midland Energy Resources Inc. can determine which of the three appropriate WACC figures to be used for future company reports. In order to calculate Midland Energy Resources’ corporate WACC, the calculations are based on the formula below, where ������������ and ������������ are the cost of equity and debt respectively, D and E are the values of debt and equity respectively, V is the company’s enterprise value, and t is the tax rate. WACC estimates for the company as a whole and for each division are summarized in Table 1. How it is arrived at these figures is shown in the calculations in Appendix 1 and the decisions for each variable are explained below. ������ ������ ������������������������ = ������������...
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...Introduction The main activity of Mead Johnson Nutrition Company is producing infants and children nutrition products and dietary supplements. It is most famous for the series of poducts such as Enfamil and Nutramigen. Mead Johson provides dietary products that suits the young human body and improves its health and growth. The company has special product lines for children suffering from nutrition problems and infants with deceases that require special diet. The company, in conjunction with pediatrists and other medical professionals, is conducting wide researches to develop their products. Presently, Mead Johson Company has eight families of products that are available in the markets worldwide. Three manufacturing facilities in theU.S. supply products to the local market. In addition, there is a facility in Mexico and in Brazil. European market is supplied with products from the manufacturing facility located in Netherlands and Asian market – from three facilities located in China, Thailand and Phillipines . Sales for the first six months of 2013 were $2,093.2 million, with the largest input from Latin American and Asian markets. Asset value for the period ending December 31, 2012 totaled $3,258.2 million . Table 1. Key Ratios (MJN) Key ratios (MJN) 2007 2008 2009 2010 2011 2012 TTM Earnings Per Share USD 5.84 2.32 1.99 2.2 2.47 2.95 3 Net Margin % 16.4 13.67 14.14 14.41 13.83 15.49 15.25 Return on Assets % 33.72 29.58 23.29 20.75 20.1 20.07 19.53 Return on...
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...warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task for students is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need for students to estimate a segment WACC draws out their abilities to critique different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft and the defense business. Thus, deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing’s overall corporate WACC. In doing so, students...
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...Case Analysis of Nike, Inc.: Cost of Capital (CON) Cost of Equity The cost of equity is comprised the cost of preferred stock and common stock. In this case, I am willing to focus on the cost of common stock because Nike did not pay any dividend after June 30, 2001(see Exhibit 4). The cost of common stock is the return needed on the stock by shareholders in which investors discount the expected dividends of the firm to ascertain its share price. To perceive this definition, let me bring you an example: Assume you want to invest on the stock of Nike, Inc. Your expected return is 12% for one year. The current share price is $42. Your benefit of the investment to purchase one share will be $5.04. If the company pay the dividend of $2.04 per share annually, the share value should increase to $45 in the next year to secure your benefit ($5.04). Therefore, the cost of equity is to cope with the risk of share price’s changes and the dividends paid by the company. There are two techniques to obtain the cost of equity as follows: 1) Capital Asset Pricing Model (CAPM) As you know, the Capital Asset Pricing Model (CAMP) establishes a rational relationship between Non-Diversifiable risk and return of all assets due to all companies can eliminate or decrease Diversifiable risk by playing on the type and return of assets. Here is the formula of CAPM: Rs = Rf + [ b * (Rm – Rf)] Where: Rs: Cost of equity Rf: Risk – free rate of return (commonly measured by the return...
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...Artforever.com is represented in Table 1, Exhibit A. In addition to its sales revenues, Artforever.com currently has $1.475M in long-term debt. Since Artforever.com is a privately held firm, the analysis of the value will be completed utilizing a comparable publicly traded firm, Arttoday.net. The purpose of this paper is to analyze the value of Artforever.com and evaluate the potential acquisition. A review of the future cash flows will be completed and utilizing comparable analysis, the beta will be calculated. Based on these calculations, a weighted average cost of capital will be determined and utilized to calculate the value of Artforever.com. Analysis Prior to determining the value of Artforever.com, an appropriate discount rate needs to be calculated. Since Artforever.com is a privately held company, there is little information available to determine the appropriate cost of capital and rate of equity. Thus, a comparable analysis was done utilizing a similar publicly traded company, Arttoday.net. Since Arttoday.net and Artforever.com operate in the same industry, this comparable analysis will provide the information necessary to extrapolate a reasonable estimate of the cost of capital and rate of equity. Arttoday.net has a beta 1.50 and a debt to equity ratio of 0.75. The beta reported is based on the complete capital...
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...Sampa Video is considering. You are asked to do your analysis using WACC, and then using APV. In both cases, you can use the data in Exhibit 2 to calculate the unlevered free cash flows of the project. Assume that these unlevered free cash flows will grow at 5% per year in perpetuity following the year 2006; that is, if you calculate the unlevered free cash flow to be UFCF2006 in 2006, the unlevered free cash flow will be UFCF2006(1.05)t−2006 in year t = 2007, 2008, . . . When calculating the project’s value using WACC, assume that the target debt-to-value ratio of the project is 25%, and that the firm will borrow at a rate of 6.8%, as suggested in Exhibit 3. When calculating the project’s value using APV, assume that Sampa Video will initially borrow $1.5 million at a rate of 6.8% to start the project. However, assume that at the end of every year for the first five years, Sampa Video will repay $150,000 in principal (in addition to the interest on the outstanding loan) and reduce the value of the outstanding loan to $750,000 at the end of 2006. After that, assume that Sampa will keep the debt at that level (of $750,000 outstanding) in perpetuity. For your calculations with both WACC and APV, do your analysis with two different assump- tions for the project’s asset beta. 1. First do your analysis using the estimate of the project’s asset beta provided in Exhibit 3 ( p A = 1.50). 2. Then repeat your analysis using the return data on comparable firms contained...
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... enterprise performance, shareholder structures. Classification JEL: G32, G34 Electronic copy available at: http://ssrn.com/abstract=1925045 Péter HARBULA: Corporate governance, shareholder structures and value creation 1. INTRODUCTION The objective of this working paper is to determine whether “hard core” governed firms truly underperform their peers. The main cornerstone of the analysis will be again to introduce the concept of shareholder structures. During the analysis, the common tools developed by corporate finance practitioners were used including, among others, value creation and return to shareholders. By performing this analysis, even if it is not the central point, the underlying question of ownership structure and efficiency will also be considered. I will also include in the analysis, beside the performance measurement tools, an analysis if the evolution of the beta factor from the Capital Asset Pricing Model (CAPM). By that, the nature of the investors versus shareholder structure will be analyzed. If there is a significant distortion between the beta factor of the different categories of firms (using shareholder structure as a sampling criteria), then this means that investors already factor in some of the consequences in their...
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