Capital Asset Pricing Model the

Capital Asset Pricing Model The Estimated Beta for the Coca Cola Company The PC Quote website (2009) estimated the number one beverage company's beta coefficient at 0.5442. This value provides the investor with the important information that the Coca Cola Company stock is less volatile and it will as such suffer fewer modifications than the market. Had the company's beta been equal to 1, it would have meant that the stock moves in the same rhythm as the market.

If on the other hand, it had been higher than 1, it would have meant that the price of the Coca Cola share was more volatile than the market. Given however that the company's beta is of only 0.54, this can be understood in terms of the Coca Cola stock being 46% less volatile than the market (Investopedia, 2009).

The fact that the KO share is less volatile than the market can also be translated in that the income opportunities to the shareholders are reduced in comparison to the gains they could register by investing in a share with a higher beta. Yet, despite the reduced amount, the 0.54 beta for the Coca Cola Company means that the placements are safer and the risks are less intense.

Relative to the inclusion of this stock into the portfolio, the investor should know that it is slightly likely for the evolution of the KO stock to impact the performance of the overall portfolio, at least in terms of its systematic risk. 2. Cost of Equity The cost of equity is generically understood as the money a company will have to pay its shareholders for having borrowed and used their money or other of their assets.

Aside the ability to have used their money, the company must also include in its cost of equity the remuneration of the risks faced by shareholders when they invested their money into the organizations. Investopedia, a noteworthy financial website designed by Forbes Media and aiming to sustain investing decisions, defines the cost of equity as "the return that stockholders require for a company […].

A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership." The CAPM equitation: ra = rf + ?a x (rm - rf) (Investopedia) In our scenario, the risk free rate is of 4.5, the risk of the security is of 0.5542 and the expected market return on the Coca Cola share is of 11. Given this situation, the cost of equity (ra) can be computed as follows: 4.5 + 0.5442 x 6.5 = 8.0373 3.

Portfolio Beta Knowing the risks associated with each investment in the portfolio, the beta of the portfolio can be computed by summing up the.