Discussion Response 4.2

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Beta

Response Guidelines

Respond to at least two peers (see below). Your responses should be substantive and could involve one or more of the following:

o Debate the topic. o Ask a probing question. o Share an insight you gained from your peer's post. o Make a suggestion. o Share a personal experience related to the topic. o Expand on your peer's post.

Student 1

Beta is the volatility measurement of the market. As the stock prices rise and fall with the market beta measures the differences in stock price within a period of time. When beta is measured at 1, it means 1 percent movement in the market. The lower the beta measurement the lower the risk. Companies that are looking to expand their organization will invest more, because they want a higher return.

Who’s Got The Beta? The article was very informative. Many financial sites will give different information on a company’s beta. Some betas are computed weekly, monthly, and daily. Retrieving information for future decisions on beta can be dishearten, because beta works on historical data with giving estimations for the future.

Ross, Stephen, Westerfield, Randolph, Jeffrey, Jaffe, Jordan, Bradford. (2018). Corporate Finance: Core Principles and Applications, 5th Edition. [Vitalsource]. Retrieved from https://online.vitalsource.com/#/books/1260384357/

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Student 2 Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.

Beta is a key component for the capital asset pricing model (CAPM), which is used to calculate the cost of equity. Recall that the cost of capital represents the discount rate used to arrive at the present value of a company's future cash flows. All things being equal, the higher a company's beta is, the higher its cost of capital discount rate. The higher the discount rate, the lower the present value placed on the company's future cash flows. In short, beta can impact a company's share valuation.

To followers of CAPM, beta is a useful measure. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk.

McClure, B. (2018, January 26). Beta: Know the Risk. Retrieved from https://www.investopedia.com/investing/beta-know-risk/