Please help me with the following problem pertaining to the value of Beta for Wal-Mart:
Using the PC Quote Web Page find the value of beta for your reference company.
a. What is the estimated beta coefficient of your company? What does this beta mean in terms of your choice to include this company in your overall portfolio?
b. Given the beta of your company, 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 to find out the present 'cost of equity' of your company. Explain the meaning of the 'cost of equity'.
c. Choose two other companies, (Lowes and Sears) 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 systematic risk that can be diversified away? Explain.
Thanks for helping me! I need approximately 500 words to be able to work off on my own, if you could provide as much, that would be great.
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This solution provides explanations and step by step calculations for beta coefficients, cost of equity, and expected rate of return.