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    Would you invest in a company with Beta coefficient below 1?

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    Would you invest in a company with Beta coefficient below 1? What do you think about volatility of current market? What about low interest rates implemented by Federal Government?

    © BrainMass Inc. brainmass.com September 27, 2022, 10:32 am ad1c9bdddf
    https://brainmass.com/business/beta-and-required-return-of-a-project/importance-of-beta-example-problem-490063

    SOLUTION This solution is FREE courtesy of BrainMass!

    Yes, I would invest in a stock with a beta below 1, especially if I believe the market will be flat or downward trending as it would protect capital the best (goes down the least when market falls).

    The current market is very volatile and so low beta stocks are attractive from that aspect. However, volatile markets are not just going down, they are also going up! That means only having low beta stocks means you may miss considerable upside as well.

    The low interest rates mean that stocks can be an attractive alternative to generating returns. When rates get so low dividends start looking pretty good, even though they may be only a 2% return. The downside of low interest rates is that folks have to take on lots of risk to get a decent return and that may not be a great idea. Those in retirement who need a 4% return to pay bills are having to take principle risk to get those returns and that can be scary and turn out badly. When they first retired, 4% was near the risk-free rate of return. With the government holding rates down, this is no longer true and hurts those that rely on fixed income instruments for their cash flow stream.

    What do you think about diversification?

    There is a temptation to think that if you diversified, you could magically erase the effects of volatility and risk but this is a misconception. While you can reduce risk and avoid "expensive risk," you cannot diversify all risk away. With that said, failure to diversify is a recipe for large swing and spotty performance.

    Do you think you can earn a higher return keeping the risk below market risk?

    Can you get superior to market returns by keeping risk below market? It is possible but hard to do routinely. Why? In order to earn higher-than-market returns, you will have to take higher-than-market risks. And so these are generally (but not always) opposing forces. This is the game that everyone is trying to play. Earn a great return without sticking your neck out and taking a big risk. If there was a "sure bet," the market would certainly not pay much for it!

    Your tutorial is 212 and talks about the pros and cons of beta and low interest rates.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com September 27, 2022, 10:32 am ad1c9bdddf>
    https://brainmass.com/business/beta-and-required-return-of-a-project/importance-of-beta-example-problem-490063

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