Systemic Risk of Coca Cola
Module 3 SLP
a) In arriving at beta one uses systematic and unsystematic risk. Systematic risk is one which can be eliminated by diversification and this are for securities of specific investments
Unsystematic risks can not be eliminated by diversification and these include interest rates and tax (Brigham, 2005) β = Systematic risk Market risk = 7.75 ÷ 4.5 = 1.723
The beta for Coca Cola Company is 1.723(www.pcquote.com/stocks/).Beta measures the unsystematic risk of a firm under analysis. Beta can be derived from sensitivity analysis.
This beta can increase the risk of investor’s portfolio as it is more than 1 as compares to the market risk. Beta measures the responsiveness of the returns in the market. The higher the beta the aggressive the share prices(Wood,Donald,2000). The beta of the Coca cola company is higher and the market is stable therefore the portfolio will have higher returns. a) Rp = Rf + (Rm – Rf) Rf – 4.5% (Rm – Rf) – 6.5% Therefore β=1.723 Rk = 4.5 + (6.5) x 1.72 = 15.68%
Cost of equity is that opportunity cost which shareholders are willing to pay for those shares. It is the cost of raising new share capital. b) Two companies – i) International Business Machine (IBM) β = 1.7302 ii) Microsoft Corporation β – 1.71 Beta for portfolio βp = 1/3 x 1.71 + 1/3 x 1.72+1/3 x 1.73 = 1.72 Rp rate for port = 4.5+(6.5)+ β = 15.68
Security return beta slope
[pic]
Market returns
The portfolio does not sufficiently diversify because it has a higher unsystematic risk of 9.2%, while the market risk is 4.5%. The riskier the investment the higher the return for that investment (Weaver, Weston, 2001).
From the graph above the higher the change in the market return, the security rate responds with a greater change therefore while investing in a
a) In arriving at beta one uses systematic and unsystematic risk. Systematic risk is one which can be eliminated by diversification and this are for securities of specific investments
Unsystematic risks can not be eliminated by diversification and these include interest rates and tax (Brigham, 2005) β = Systematic risk Market risk = 7.75 ÷ 4.5 = 1.723
The beta for Coca Cola Company is 1.723(www.pcquote.com/stocks/).Beta measures the unsystematic risk of a firm under analysis. Beta can be derived from sensitivity analysis.
This beta can increase the risk of investor’s portfolio as it is more than 1 as compares to the market risk. Beta measures the responsiveness of the returns in the market. The higher the beta the aggressive the share prices(Wood,Donald,2000). The beta of the Coca cola company is higher and the market is stable therefore the portfolio will have higher returns. a) Rp = Rf + (Rm – Rf) Rf – 4.5% (Rm – Rf) – 6.5% Therefore β=1.723 Rk = 4.5 + (6.5) x 1.72 = 15.68%
Cost of equity is that opportunity cost which shareholders are willing to pay for those shares. It is the cost of raising new share capital. b) Two companies – i) International Business Machine (IBM) β = 1.7302 ii) Microsoft Corporation β – 1.71 Beta for portfolio βp = 1/3 x 1.71 + 1/3 x 1.72+1/3 x 1.73 = 1.72 Rp rate for port = 4.5+(6.5)+ β = 15.68
Security return beta slope
[pic]
Market returns
The portfolio does not sufficiently diversify because it has a higher unsystematic risk of 9.2%, while the market risk is 4.5%. The riskier the investment the higher the return for that investment (Weaver, Weston, 2001).
From the graph above the higher the change in the market return, the security rate responds with a greater change therefore while investing in a
References: 1. C. Hall wood, R. Mc Donald; International Money and Finance; Blackwell Pub, 2000 2. Eugene Brigham, Michael Ehrhardt; Financial Management, Theory and Practice, Thomson South-Western, 2005 3. Samuel Weaver, John Weston; Finance and Accounting for non-financial Managers; Mc Graw-Hill, 2001 4. www.pcquote.com/stocks/