Risk Assessment of Strident Marks
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The CFO has requested from you, a risk assessment of Strident Marks. Think about the risks inherent in Strident Marks and how to quantify these risks. Calculate the measure of risk for this company (defined as Beta in the Capital Asset Pricing Model - CAPM) and explain why this calculation is a measure of risk. Discuss when this type of calculation is appropriate, and when the coefficient of variation is an appropriate measure of risk. Your work must analyze the specific calculations completed in the task.
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Solution Summary
The solution analyzes and computes a risk assessment of Strident Marks. The measure of risk for this company is calculated and explained.
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RISK AND BETA
Risk is the uncertainty that you may not earn your expected return on your investments. For example, you may expect to earn 20% on your stock mutual fund every year. But your actual rate of return may be much lower.
For example, the S&P 500 index averaged yearly gains of about 20% for the five years that ended in 1999. In 2000, however, the index declined more than 9%. Bonds, meanwhile, performed better than stocks for the first since 1994.
Explanation of beta
Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall market. In other words, it gives a sense of the stock's market risk compared to the greater market. The Beta factor measures how volatile a stock is when compared with an index. The higher the beta, the more volatile the stock is. (A negative beta means that the stock moves inversely to the market so when the index rises the stock goes down and vice versa).
Stock portfolios are measured for risk using Beta. Stocks customarily will move up and down with indexes such as the NYSE, NASDAC and the S & P 500. Stocks can be just as risky as market averages. The measure of stocks, the beta, is used to predict the measure of risk in the market. A Beta of 1.0 or higher indicates the stock would have more risk than the market average. If the Beta score is under 1.0 then would be less risk than the market average.
A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market, ...
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