The beta coefficient for Stock C is bC = 0.4 and that for Stock D is bD = ?^?0.5. (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.)
a. If the risk-free rate is 9% and the expected rate of return on an average stock is 13%, what are the required rates of return on Stocks C and D?
b. For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock were not in equilibrium.
The Beta Coefficient is an important indicator of a stock’s volatility relative to the overall stock market. The Beta Coefficient is used to measure the risk of investing in a security relative to its benchmark. In other words, it measures the stock’s tendency to move or not move with the market. The Beta Coefficient of a stock is calculated by dividing the stock’s actual return by the market’s return.
Recently, the Beta Coefficient for stock c has been reported as 0.4, and for stock d it has been reported as 0.2. The Beta Coefficient of 0.4 for stock c indicates that it is more volatile than the stock market as a whole. This means that its price tends to move with the market in a more substantial way than the others. In other words, the risk of investing in stock c is greater than that of investing in the market as a whole.
On the other hand, the Beta Coefficient of 0.2 for stock d indicates that it is less volatile than the stock market as a whole. This means that its price tends to move with the market in a relatively mild way. In other words, the risk of investing in stock d is lower than that of investing in the market as a whole.
Therefore, it is important for investors to understand the Beta Coefficient of a stock in order to make more informed decisions about investing. By looking at the Beta Coefficient for stock c and stock d, we can see how these two stocks compare to the overall stock market and make an educated decision about which stock to invest in.
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