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Estimated Beta Coefficient
Based on data from Coca-Cola stocks and the market index, the beta coefficient can be taken to be 0.57 (Yahoo Finance, 2011). In order to arrive to this answer, several concepts have to be considered. One of these is the stock value, which has to be computed in the presence of the beginning value. The stocks are very essential for the development of the arithmetic returns required during any financial computation. In order to get to the arithmetic returns, the beginning value is subtracted from the stock value. The result is then divided with the beginning value to attain the desired returns arithmetic to be used in the regression analysis.
In order to benefit from any investment, the specific risks undertaken by a company have to be corrected before investors can be allowed to gain form the investment’s risks. With comparisons being made between the market indexes and the individual securities, the returns for the coca Cola company were computed against the associated risks to arrive to the beta coefficient (McClure, 2010).
Choice of the Company in Overall Portfolio
From the above value, the Coca-Cola Company is in the low volatility portfolios and for this reason, they have huge returns with very low risks. Being an international company and among the biggest soft drinks manufacturing company, Coca-Cola faces huge market demand and its associated risks are minimal. The potential to grow is very huge for this company and the number of investors benefiting from the company’s returns is very many. This means that the company has a stable financial framework that can outperform broader market indices.
Calculating Cost of Equity
Given that the beta coefficient is 0.57, the government bond is 4.5%, and the difference between the expected rate of return and the risk free rate of interest, the cost of equity can be computed.
Using the equation of CAPM, we have that
….equation 1 (McClure, 2010).Where
Rf=? government bonds
Substituting the values given in equation 1, we get
Converting to percentage, we have the cost of equity is 7.75%
Meaning of Cost of Equity
By definition, the cost of equity is the annual return rate expected by the investor from any investment into the shares of a given company (McClure, 2010). These returns are represented in form of dividends that are paid at the end of each fiscal period and any other change in the market value of the shares during its trading period. These values are mostly represented in percentage form to represent a gain from the initial share value.
Betas of Other Companies (Nokia and Apple)
The Nokia Company, its recent beta coefficient was 1.57 (Crosno, 2011). According to Galaxy Stocks (2011), the beta coefficient of Apple is 1.34.
Beta Portfolio
After investing a third of into the companies’ stock, for Nokia, I would have a beta portfolio of 1.57х33.33%=0.523. After investing in Apple Company, I would have a beta portfolio of 1.34х33.33%=0.447.
Expected Rate of Return
Given that the beta coefficient is 1.57 for the Nokia Company, the government bond is 4.5%, and the difference between the expected rate of return and the risk free rate of interest is 6.5%, then, using the equation of CAPM, we have that equation 2
Where
Rf=? government bonds
Substituting the values given in equation 1, we get
Converting to percentage, we have the cost of equity is 14.705%
for the Nokia company and using the same formula for the Apple company, we get CoE=4.5%+1.34/6.5%/=13.21%.
Stock Diversification
The three-stock portfolio is well diversified since its market risks are concentrated onto asset classes that are not correlated. In addition, their beta coefficients illustrate that there is higher diversification degree from the asset classes provided.
References
Crosno, S. (2011). Nokia Corporation Market Price Strengthened Against SMAs – NYSE:NOK. Web.
Galaxy Stocks. (2011). Apple Inc Revolutionizes the Video Editing Experience by Launching Final Cut Pro® X – NSDAQ: AAPL. Web.
McClure, B. (2010). The Capital Asset Pricing Model: An Overview. Web.
Yahoo Finance. (2011). The Coca Cola Company (KO). Web.
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