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# Beta coefficient and 'cost of equity'of Raytheon

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What is the estimated beta coefficient of Boeing Co?
a. What is the estimated beta coefficient of Raytheon? What does this beta mean in terms of your choice to include Raytheon in your overall portfolio?

b. Given the beta of Boeing Co, 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 Boeing Co? 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.

#### Solution Preview

What is the estimated beta coefficient of Boeing Co?
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
Beta of Boeing is 1.28
http://finance.yahoo.com/q/ks?s=BA

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

Beta of Raytheon is 0.73. This Beta indicates that the correlation between the change in the price of Raytheon and the change in market price is positive and moderate. This means that the Raytheon's market risk is below average.

http://finance.yahoo.com/q/pr?s=RTN

b. Given the beta of Boeing Co, the ...

#### Solution Summary

Response discusses computation of 'cost of equity'

\$2.19