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Decision Making Process in the Field of Finances - Essay Example

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The essay "Decision Making Process in the Field of Finances" provides deep insight into the strategic and financial decision making based on particular cases. …
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Decision Making Process in the Field of Finances
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Download file to see previous pages Like the beta obtained as per calculations is based on the returns over the last twenty-four months whereas Bloomberg may calculate the beta daily. Therefore, the main reason for varying beta is the ‘period’. Also, the beta calculation has been based on the returns of FTSE 100 whereas the publisher may have used a different index.
As the publisher uses an extensive period in estimating beta it is more reliable as it covers a longer period and is thus more representative. On the other hand, the beta that has been calculated based on the returns over the last two years takes into account the volatility only during this period. This fails to give a true picture of the stock sensitivity. Suppose, during these two years there is a crisis in the market then this is bound to impact all the stocks. In such situations, if the beta is calculated based on the fluctuations over a wide range of period then this will provide a better basis for judgment.
The beta of Tullow Oil Plc is 0.64 and that of Investec Plc is 2.17. If the beta of the stock is more than 1 it is called an ‘aggressive’ stock whereas if the beta is less than 1 the stock is referred to as ‘defensive’ stock. In the case of aggressive stock, the fluctuation in the stock returns is more than the market returns. Like if the beta of the stock is 1.50. This means that if the market moves up by 10 percent the stock will move in the same direction by 15 percent. Similarly, for a defensive stock with a beta of 0.25 like Wal-Mart if the market falls by 10 percent the price of Wal-Mart will fall by only 2.5 percent (Yahoo Finance-d, 2010). This means that Tullow Oil Plc is a defensive stock as its beta is less than 1 whereas Investec Plc is an aggressive stock. This means that the stock price of Investec Plc will move more than in proportion to the market movements.  ...Download file to see next pagesRead More
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