Investment Portfolio the Beta Coefficient for Google,

Investment Portfolio

The beta coefficient for Google, Inc. is 1.03 using the Excel Slope function (Christensen). Using the S&P 500 as a benchmark, this beta coefficient has a higher risk than the market (Christensen, How to Interpret a Beta Coefficient). With this stock included in a portfolio, it would need to be diversified with less riskier investments in order to balance the overall portfolio risk and return on investment aspects of the portfolio. Because the Google stock is at a higher risk, it could bring higher returns.

Using a CAPM calculator (Chimp), the cost of capital for Google, Inc. is 6.76%. The CAPM is a capital asset pricing model used to determine the cost of equity. The cost of equity is the return that stockholders require for a company and represents the compensation the market demands in the exchange for owning the asset and bearing the risks of ownership (Investopedia). The cost of equity is what is used to determine whether owning the stock is worth the risk involved to purchase it. If the return is extremely low, investors would probably consider other stock that would provide more adequate returns for their investments. But, if the return is rather high, it could be diversified with alternative investments to make the risks involved with the stock worth considering as part of the investment portfolio.

The beta for Yahoo is 0.9 and for Microsoft is 1.06 (Yahoo). With Google, Inc. having a cost of equity of 6.76%, Yahoo a 6.3%, and Microsoft a 6.62%, the expected rate of return would be an average of 6.56%. A portfolio that includes just the three stocks would still be a very high risk portfolio. Even though there is a high rate of return, the risks are very high as well. With Google's beta at 1.13, the average beta would be 1.03, which is still more volatile than the market and at a higher risk than the overall market.

A portfolio needs to be diversified with stocks from different industries, companies of different sizes, and include different asset classes, such as bonds, cash, real estate, and other alternative investments (Little). Google, Inc., Yahoo, and Microsoft are all competitors in the same industry. In order to diversify the portfolio, there would need to be stock from other companies in different industries, with preferably a beta of less than one to balance the high risk of return with the actual return on investments. It would also need some other alternative investments, even though they are lower in returns, they are also lower in risk. By balancing the risk with the return on assets, the portfolio would have more diversification.

An example of a diversified portfolio would be something like; having a rental property, valued at $300,000, and rented at $1,500 a month, with $700 payments and $300 for insurance and maintenance costs, yielding an overall 2% return, bonds that yield 4.5% return, a savings account with 5% return, and the three stocks. The average return on investment with this portfolio would be about 5.2% and the beta coefficient would be closer to 1 to meet market volatility. With having a mixture of investments that yield high and low returns, as well as having high and low risks, the return would be lower and have a lower risk. To make more diversity, stocks from companies in different industries could be added that have lower returns and lower risks than the technology companies, but higher than the alternative investments.