Beta Project Assignment Help
Capital Asset Pricing Model Beta Project
Introduction
Beta is an important part of the Capital Asset Pricing Model (CAPM) used as a measure of risk. In finance, beta of investment security or stock is a measure of its volatility of returns relative to the market. As a measure of stock’s volatility, the market has a beta of 1.0, and individual stocks rank based on the deviation from the market (Ben David, 2014). Therefore, stocks that swing more than the market beta over time have a beta greater than 1.0 while those that swing less than the market have a beta less than 1.0. Beta is the single most imperative measure of stock risk or volatility since it provides at-a-glance insight into the movement of a specific stock relative to the entire market. Beta or financial elasticity is an important measure that helps to understand a stock’s risk profile. Using the beta values for various stocks, we can determine the risk or volatility of their cash flow in relation to the nature of the business, risk, and industry.
Tiffany & Co (TIF)
Tiffany & Co is an American company operating in the luxury jewellery industry engaging in retail sales and manufacture of luxury products such as stationery, fragrances, water bottles, watches and personal accessories. The main target includes America, Europe, and the Middle East and Asia-pacific regions. The company is listed in the New York Stock Exchange with a beta of 1.57 based on the provided data.
Tiffany & Co engages in the manufacturing and sale of discretionary products. These are non-essential or luxurious products which are desirable if the consumer has sufficient income to purchase them. The nature of Tiffany & Co business is discretionary which translate to high volatility as indicated by the beta index (Blitz, Pang, & Van Vliet, 2013). Based on the capital asset pricing model (CAPM), the beta of a stock measures its risk. Assuming that the beta is measured correctly, this implies that the company is 1.57 times more risky than the average company in the market. The beta index is an important indicator of the systematic risk which includes changes in interest rates and trends in the overall economy. A beta index greater than 1 implies that the TIF stock price is sensitive and more vulnerable to systematic risk than the entire market (Blitz, Pang, & Van Vliet, 2013). The beta for TIF Company is important in understanding the luxury products in the cyclical sector/industry since it shows that firms in this industry have a high beta index (greater than 1) which translates to high volatility of cash flows and systematic risk.
Amazon Corp (AMZN)
Amazon is an American online retail firm that offers a range of products through its official websites. It sales merchandise and content purchased for resale, manufactures electronic devices, and healthy organic food through the Whole Food Market Inc. In the beta data provided, Amazon has a beta index of 1.43 which is greater than the entire market. A beta greater than 1 implies that the company has a higher level of risk and volatility compared to the stock market (Menike, 2006). In this case, the direction of the stock price will be the same as the stock market movement but it will be extreme. A positive movement of the stock market prices will result in a high profit for the investors but a negative movement will be a high risk for investors.
Amazon engages in consumer cyclical including both the durable and non-durable sections. Consumers cyclical are stocks that depend on business cycles and economic conditions and include industries such as retail, entertainment, housing, and automotive. The durable cyclicals provided by Amazon include hardware such as car-parts and the non-durables include cleaning supplies, clothing, or food. The type of business at Amazon is cyclical which translate to a higher beta index of 1.43 implying a high risk and cash flow volatility. Amazon has a high risk of 1.43 than the average company in the market.
General Electric Corp (GE)
General Electric Corp (GE) is an American multinational conglomerate operating in the energy sector. The company is listed in the NYSE and serves governments and private sector players in different industries including health, transportation, aviation, and power, oil, and gas. The company has a stock beta of 1.15 which is greater than the market stock of 1. This implies that the company has a higher risk and cash flow volatility. The nature of business for the GE is non-cyclical implying that it provides goods and services that people continue purchasing irrespective of the business cycle or economic condition (Kolani & Vikpossi, 2014). In this case, energy is essential in all sectors since it is a major factor that drives businesses and the operation of society. Non-cyclical-stock is minimally affected by positive or negative movements in the economy. In this case, GE stock has a little movement to the cycle. Additionally, the products offered by GE are so essential that consumers and businesses cannot survive without irrespective of the state of the economy. For example, a health facility will require power and energy even when the prices of the stock are high. The GE operates in the energy sector which falls within the standard and poor sector. The sale of non-cyclical or defensive stock such as utilities like gas and electricity ensures that the business risk and industry risk are low compared to other businesses in the cyclical stock businesses.
Microsoft Corp (MSFT)
Microsoft is a technology company that develops licences, and support software products, services and devices. The company has a stock beta of 0.99 which is equivalent to 1. This implies that the firm has the same level of risk as to the stock market. This implies that the cash flow volatility for Microsoft is consistent with the market volatility. The nature of business for Microsoft is dealing with information technology and telecommunication services under the standard & poor sectors. These are cyclical stocks that depend on the business cycle and economic condition. When the economy is doing well, people more on software and other technological devices and when the economic performance is poor such as in a recession, people do not spend more (Baker, Bradley, & Wurgler, 2011). This implies that Microsoft has a low beta translating to low risk and cash flow volatility.
Phillip Morris Corp
Phillip Morris Corp is a tobacco company that deals with the manufacturing of cigarettes in the United States. According to the provided data, the company has a beta of 0.9 which is close to 1, the market average. The business nature of the firm deals with consumer staples, which are goods bought out of necessity such as tobacco and food. This implies that the company has stable cash flow volatility since these are defensive products. Companies dealing with consumer staples generate steady cash flow and predictable earning during the strong and weak economies. The tobacco industry is a stable industry that does not rely on business cycles or economic conditions since the consumers of tobacco purchase the products to satisfy their need. This implies that the beta of 0.9 is closer to the market average of 1. Tobacco is a defensive stock that shows stable revenue and stock prices regardless of the economic state. The company has a stable stock price as indicated by the beta indicator of 0.9 implying that the risk is low and the cash flow volatility is stable.
Exxon Mobil Corp (XOM)
Exxon Mobile Corp is an American based multinational oil and gas corporation listed in the NYSE. The company engages in the manufacturing of premier petroleum and chemical products. The chemicals produced by the company are essential for the operation of many businesses and consumer use every day. The company beta of its stock is 0.83 implying that the stock price moves with the overall market. However, stock prices remain less risky and volatile. The nature of the business at Exxon Mobil deals with defensive stock or non-cyclical stocks under the utility category since these chemical products are needed at all phases of business operation. The low beta of 0.83 is lower than 1 but less than zero indicating that the company has less risk and stable cash flow volatility.
Newmont Mining Corp (NEM)
Newmont Mining Corp is an American mining company based in Colorado traded in the NYSE since 1940. The company mines metals such as gold, copper, silver, lead, zinc, lithium, and uranium (Newmont Goldcorp Corporation, 2019). The company has a negative beta of -0.21 which implies significantly lower volatility than the market volatility. According to Caplinger (2012), mining companies engaged in the mining of gold and precious metals move against the market since these metals attract safe-haven money when stocks start to decline (Streissguth, 2019). Although the beta is negative, implying that the investment moves in the opposite direction from the stock market (Caplinger, 2012). In this case, a fall in the stock market results in an increase for a negative beta and vice versa. This implies that the negative beta value for NEM is due to the nature of its business which involves engaging with precious metal such as gold which is a secure store of value.
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