Beta of Csx Railroad Find the Beta

¶ … Beta of CSX Railroad

Find the Beta of CSX

What is the estimated beta coefficient of CSX? What does this beta mean in terms of CSX to include them in my overall portfolio?

The estimated beta coefficient on CSX is 1.24. It is used to determine the underlying volatility in the stock. In general, when you see a beta factor greater than 1.0 this is an indication that the security is more volatile than the stock market average. In the case of CSX, the reading of 1.24 indicates that the stock is 24% more volatile than the major stock market averages. This will increase the overall amounts of volatility in the portfolio. While providing, a way to see above average returns, because of the increased volatility. ("Beta," 2010)

Given the beta of CSX, the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is - the difference between the expected rate of return on the 'market portfolio' and the risk free rate of interest) is 6.5%, use the CAPM equation in order to find out what is the present 'cost of equity' of CSX? Explain what is the meaning of the 'cost of equity'.

The CAPM equation is designed, to determine the underlying amount of risk of investing in a particular security. Under this equation, the overall risks are determined by taking:

Risk Free Return + the Beta (Expected Market Return -- Risk Free Return) = Risk Premium

Applying this information to CSX you would have a market risk premium of 2.57%. This was calculated by taking:

.045 + 1.24 (.065 - .045) = .0257 x 100 = 2.57%. ("Capital Asset Pricing Model," 2010)

The cost of equity is the required return that investors are seeking for owning the stock. ("Cost of Equity," 2010) This number is calculated using the following formula:

Dividends / Price of the Stock + the Growth Rate of Dividends = Cost of Equity

When you apply this formula to CSX you would have a cost of equity of 17.63%. This was calculated using the following equation:

$1.04 / $63.68 + .016 = .1763 x 100 = 17.63%.

When you compare the market risk premium with the cost of equity, it is clear that investors are demanding an expected rate of return of 17.63%. ("CSX Corp," 2010)

Look up the beta for McDonald's and Wal Mart and report their betas. Suppose I invest one third of my money in each of the stocks of these companies, What will the beta of the portfolio be? Given the data in (B), what will the expected rate of return on this portfolio be? Do you feel that the three-stock portfolio is sufficiently diversified or does it still have risk that can be diversified away? Explain.