Beta Project - Assignment Solution

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.