Wal-Mart Financial Analysis (Essay Sample)
Using Yahoo! Finance find the value of beta for your reference company. Write a two page paper discussing the following items:
- 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?
- 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 in order to find out what is the present 'cost of equity' of your company? Explain what is the meaning of the 'cost of equity'.
- 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.
SLP Assignment Expectations
In a two-page report explain your answers thoroughly with references to the background materials. Make sure to demonstrate a strong understanding of the concept of beta and the risk/return trade off.source..
7th September 2015.
The analysis of a company is usually, in most cases based on its productivity; its economic viability in terms of how much business it does. Look at the company's stock, especially the movement and prices, is fundamental towards this end. The company selected for this task in Wal-Mart.
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?
Wal-Mart is one the biggest corporations not only in the U.S, but globally as well. Its estimated beta stands at 0.2156.Beta is a tool of measurement, which helps in analyzing the correlation between the stock and market movement. There are three main criteria of ensuring that the portfolio an investor builds is fully diversified and less risky. These are; selection of stocks that correlate with the market, selection of stocks that inversely correlate with the market, and selection of stocks that are not dependent on the market. From the estimated beta of Wal-Mart, it can be noted that a beta of 1 is the reference point, and it stands for the market's beta. Therefore, if stocks rise or fluctuate more than the market movement, then they have a beta of more than 1, the converse is true as well(QFinance,n.d.). Mathematically, this means that stocks which display an inverse correlation to the market movement have a negative beta. The beta of 0.2156, as is the case with Wal-Mart is an indication of a movement in tandem with the market, but at volatility that is approximately 81% less. The less volatility provides an ideal selection for a fully diversified 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 in order to find out what is the present 'cost of equity' of your company? Explain what is the meaning of the 'cost of equity...
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