Running Head: CAPITAL BUDGETING
Name of the Student
Beta can be described as a measure of relative volatility. It is used to measure the
systematic risk of a portfolio or security in comparison to the whole market. It is a multiplicative
factor. When investing, beta is used as a fundamental tradeoff between maximizing returns a
minimizing risk. A good example is when a company has a beta of 2; it means its volatility is
twice the overall market. When the beta is negative, it indicates an inverse relation to the overall
market. This negative beta is highly unlikely. If we expect investment returns of 5%, then a
return of 10% of the company is expected. On the other hand, a decline in the market of -5%
would result in -10% returns (loss).
The following are the current Beta coefficient of four American companies for the year
2018 based on the S&P 500 index. Exxon Mobil (0.85), Starbucks (0.66), JPMorgan Chase
(1.110) and Goldman Suchs (1.24). Looking at the four companies, we can observe that the beta
of Goldman Suchs is the highest meaning that its stock is more volatile than the other three while
Starbucks is the least volatile...
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