Finance slp 02 pc quote web - Essay Example

Finance SLP From its humble beginning as a “pile it up and sell it cheap” store, Wal Mart Stores Inc has risen and become recognized as a giant in the retailing industry. In general, the rationale in including in my portfolio is its strong brand equity, sound financial performance, and expected returns. According to the PC Quote Website, Wal Mart’s beta coefficient which indicates the general level of risk shouldered by investor is 0.1467. Beta coefficient can be defined as an indicator of how the expected return of a stock is correlated with the entire market (Levinson 2006).

As Wal Mart has a beta coefficient of 0.1467 it implies that the stock generally follows market movements. It also shows the relatively less risk it carries relative to the market (Levinson 2006). However, recognizing the theory of risk and return, the gains in investing in Wal Mart’s stocks is proportional to the risk involved in holding the stock. Since the stock generally carries less risk than the entire market, it also gains less relative to it. When investors put their fund in stocks, they expect to have financial gain from it.

The cost of equity is the return that stockholders require for a specific stock that they hold. Using the Capital Asset Pricing Model, Wal Mart’s cost of equity can be computed as: Using the yield to maturity of US bonds maturing in one year (4.5%) as the risk free rate and the difference between the return of the market and risk free rate as 6.5%, the cost of equity of Wal Mart is 5.45% computed as ( 4.5% + 0.1467 (6.5%)). Two other stocks in my portfolio are Nike and Fed Ex which have beta coefficients of 0.

8244 and 0.8418. When taken altogether, the average beta coefficient of my portfolio is 0.6043 ((0.8244 + 0.8418 + 0.1467)/3). Using the assumption above, the cost of equity is 8.42% (4.5% + (0.6043) (6.5%). Looking at the beta of the chosen business organizations, it becomes apparent that it can still be diversified. All of the beta coefficients are positive and less than one which means that they are carry less risk and are generally less volatile than the market (Keown et al 2005). I can try to further diversify the portfolio by getting a stock whose beta coefficient is more than 1 in order to shoulder more risk which in turn generates more returns (Keown et al 2005) .

It will also be logical to carry a stock whose performance is negatively correlated to the market. This stock will have a negative beta coefficient. Works Cited Keown, A.J., Martin, J.D., Petty, J.W., and Scott Jr., D.F, 2005, Financial Management principles and applications, Pearson/Prentice Hall International Edition, 10th Edition.Levinson, M., 2006, Guide to Financial Markets. London: The Economist (Profile Books), pp.145-6. ISBN 1-86197-956-8.