How to Manage Your Money: Know your Beta - Essay Example

Company’s (like Wal-Mart, Kmart, etc.,) security returns will also be affected. If oil prices are increased in the market there will be a considerable impact on other goods. Indirectly the price of other goods will rise. There is an overall risk of raising capital for firms. Whenever any entrepreneur wants to run a company/firm with a low budget and high profit, the entrepreneur would consider different terms of interest rate, production, long-run growth, and company debentures.

           A mix portfolio of 40% is invested in A  + 40% of investment in B, which may earn only 7% in a good market but booms to 14% in a recession, and the other 20% in government investment G earning 4%.   Portfolio Expected Return for Portfolio P:

E(RP) =   [.40 x E(RA)]  +  [.40 x E(RB)]  + [.20 x E(RG)]

 Where    E(RA) =8.8%, E(RB) =9.8% and E(RG) = 4% (the risk-free rate)

E(RP) =   (.40 x .088) + (.40 x .098) + (.20 x .04)

E(RP) =  .0824 or 8.24%.

         The total risk of any investment is equal to both the market risk and diversifiable risk. “The market risk is called systematic risk and the diversifiable risk is called as unsystematic” (D. B. Hamm).

         Total risk = market risk + diversifiable risk = Systematic risk + Unsystematic risk.

           Systematic risk or market risk is measured by a beta coefficient or b. The general rule for beta is given as follows:

• b=1.0 indicates the risks involved in investment in the market are normal.
• b<1.0 indicates risks involved in investments in marker are below normal.
• b>1.0 indicates risks involved in investments in marker are above normal.

           Suppose if the beta value of a company is b = 1.2 the risks involved are 20% higher than the normal risk. If b = 0.8 then the investment has 20% below market risk. Risks are involved in the investment market; if the potential returns are higher then the potential risks involved in it are also higher.

           A clever investor wants his money to be doubled or at least the amount invested should return. The company that is having b = 1.0 is mostly favored by the investors. More or less Wal-Mart b value is just above normal market risk.