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Beta

I used IBM as my discussion company to explain beta so far I have come up with this...

Beta is a measure of stock price fluctuation, as compared to an "average" company. If a particular stock has a high beta, that means the price fluctuates. Raising capital equity will be based on seeking out those ventures who thrive on rollercoaster rides in stock value. I am not certain the effect extends further than that. Your last question begs for amplification. If you mean merge businesses which fluctuate in stock price with those who don't, the answer is no. I would combine businesses based on business sense..that is, does it make sense product or service wise to merge. but my instructor said I did not answer all of the questions asked and I should provide at least two pages of better and more detailed information.

1 IBM has a beta of 1.65 what does this beta mean in terms of the overall risk of the company as the shareholders perceive it? What are the implications for raising equity capital for IBM based on this beta?

2 If I were going to select Dell or HP to merge with based on IBM's beta, should I choose to merge with the high beta or low beta company.

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1 IBM has a beta of 1.65 what does this beta mean in terms of the overall risk of the company as the shareholders perceive it? What are the implications for raising equity capital for IBM based on this beta?

Let us first understand what a beta exactly is.

Beta is a statistic that measures an underlying stock's volatility (risk) in relation to the broad market. It tells us if a stock is more volatile or less volatile than the broader market indices, such as the S&P 500.

If a stock has a beta of 1, its price moves as much as the S&P. A beta greater than 1 means a stock is more volatile than the S&P. A beta below 1 implies less volatility.

It's really very simple. If a stock has a beta of 1.5, than it's 50% more volatile than the S&P on any given day. If a stock has a beta of 0.50, it is 50% less volatile.

(It's very important to note that while beta attempts to predict a stock's volatility in relation to the broader market indices such as the S&P 500, it doesn't ALWAYS do so. By this, I mean that even if a stock has a beta of 1.5, it won't always move 50% more than the S&P.)

In general, safer, slower stocks like utilities have lower betas - usually less than 1. More risky equities though, like Internet stocks, have betas greater than 1.

source: http://www.smartoptionsreport.com/Archives/2005/20050927.html

Thus, from a shareholder's perspective who is either an investor in the stock or is planning to invest in the stock of IBM, a beta of 1.65 implies that IBM is placed in the higher risk zone in terms of its volatility or in other words, the movement of the stock price. The investor will be little cautious while investing in such high beta stocks as dramatic movements can occur in the stock price on either side, especially in a market which is observing very high volatility. Thus, a stock like IBM with a high beta will generally not appeal to risk averse investor or conservative investor, who does not have a high appetite for risky stocks. Similarly, it will ...

Solution Summary

Beta is a measure of stock price fluctuation, as compared to an "average" company. If a particular stock has a high beta, that means the price fluctuates.

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