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    'Cost of equity' using Beta

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    Using the PC Quote Web Page find the value of beta for Wal-Mart.

    a. What is the estimated beta coefficient of Wal-MArt? What does this beta mean in terms of your choice to include Wal-MArt in your overall portfolio?

    b. Given the beta of Wal-MArt, 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 Wal-MArt? Explain what is the meaning of the 'cost of equity'.

    c. 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.

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    Solution Preview

    a. What is the estimated beta coefficient of Wal-MArt? What does this beta mean in terms of your choice to include Wal-MArt in your overall portfolio?

    Beta of Wal-Mart is 0.23.
    According to the wikipedia
    The Beta coefficient, is a measure of volatility of a stock or portfolio in relation to the rest of the financial market.
    An asset with a beta of 0 means that its price is not at all correlated with the market; that asset is independent. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up.
    http://en.wikipedia.org/wiki/Beta_coefficient

    Hence Wal-Mart's beta of .23 ...

    Solution Summary

    Response provides steps to compute the 'cost of equity' using Beta

    $2.19

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