a) Beta in financial terms is the amount of systematic risk brought by vulnerability of movements in the market.
Beta of equity is found by using the following formula:
First of all, in order to determine the beta of firm’s equity we need the covariance of stock return and market return (i.e. return index).
Then variance should be determined. We use formulas for:
Covariance
Variance
R i-stock return
R m - market return
P-probability
As there are 5 states of economy, in our case the probabilities of them can be found by = 0.2 or 20%.
Numbers Economic cycles Stock index returns (%) ( )
Stock returns (%) ( )
1 Growth 2 5
2 Boom 7 6
3 Stagnation -1 4
4 Recession -3 -6
5 Depression -5 -11
Covariance is basically a form of the variance calculation that compares two assets.
This is how we computed covariance:
Average of Stock index returns
Average of Stock returns
2 5.4 2.16
7 6.4 8.96
-1 4.4 -0.88
-3 -5.6 3.36
-5 -10.6 10.6
Total: 24.2
Now we need to compute the variance of stock return and market return
2
2 4 0.8
7 49 9.8
-1 1 0.2
-3 9 1.8
-5 25 5
Total: 0 88 17.6
At the end of this step we got the covariance and variance of firm’s equity and we can proceed to the calculation of the beta:
Beta of the equity is found to be equal to 1.375
b) Beta of the company is calculated given that the beta of the firm is weighted average of the beta of its debt and equity.
Beta of debt is given – 0.18
The beta of equity is found – 1.375
Debt is 2,000,000
Equity is 6,000,000. Using those figures, we can solve the company’s beta:
c) Afterwards, we are required to determine the portfolio’s beta including the investment, knowing that beta for cash is ...
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...ods when the total number of buyers will dominate. Therefore, it has an incontrovertible influence of stock prices, and on the contrary, the minority of people is ready to pay towards.
Lastly, in theory and in practice, market condition playing an integral role and probably indicates most sensible clarification of the tendency of different values. The market is imperfect and it should never be forgotten. No one ensure the presence of instant buyers and sellers in the market. For example, there are a number of different events such as inflation rate which impact the stock price and the organization’s worth.
The dissimilarity among these two values is essential, particularly when considering investments. As it can be a perfect guide when dealings in the real market, the financial managers are not exempted to ignore the theoretical value by the fact that they vary.
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