Finance slp 02 pc quote web Essay Example | Topics and Well Written Essays - 500 words

Finance slp 02 pc quote web - Essay ExampleAs Wal Mart has a beta coefficient of 0.1467 it implies that the stock generally follows market movements. It also shows the proportionally less risk it carries relative to the market (Levinson 2006). However, recognizing the theory of risk and return, the gains in investing in Wal Marts stocks is proportional to the risk involved in holding the stock. Since the stock generally carries less risk than the entire market, it also gains less relative to it.When investors put their fund in stocks, they expect to have financial gain from it. The terms of equity is the return that stockholders require for a specific stock that they hold. use the Capital Asset Pricing Model, Wal Marts cost of equity can be computed as utilise the yield to maturity of US bonds maturing in one year (4.5%) as the risk free rate and the difference between the return of the market and risk free rate as 6.5%, the cost of equity of Wal Mart is 5.45% computed as ( 4.5% + 0.1467 (6.5%)).Two other stocks in my portfolio argon Nike and Fed Ex which have beta coefficients of 0.8244 and 0.8418. When taken altogether, the average beta coefficient of my portfolio is 0.6043 ((0.8244 + 0.8418 + 0.1467)/3). Using the assumption above, the cost of equity is 8.42% (4.5% + (0.6043) (6.5%).Looking at the beta of the chosen business organizations, it becomes apparent that it can still be diversified. All of the beta coefficients are positive and less than one which means that they are carry less risk and are generally less volatile than the market (Keown et al 2005). I can try to further diversify the portfolio by getting a stock whose beta coefficient is to a greater extent than 1 in order to shoulder more risk which in turn generates more returns (Keown et al 2005) . It will also be logical to carry a stock whose performance is negatively correlative to the market. This stock will have a negative beta