Week 4 Individual Assignment

Week 4 Individual Assignment - Casa Bonita Memo To: Rainier...

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Casa Bonita Memo To: Rainier Ekstrom Re: The stocks that have been chosen are: Levinthal Defense Systems, Desktop Inc., ???? When choosing my stock I took a look at the beta of each stock. My investment strategy was to provide a portfolio offered three stocks of very minimal risk, with one stock representing a high risk high reward situation. The beta of a portfolio is the weighted sum of the individual asset betas (Wikipedia, 2011). The Beta of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole. Beta incorporates the correlation of returns between the security and the market. In addition, beta is a key component to the capital asset pricing model (CAPM), which represents the discount rate investors use to determine the present value of a company or firms future cash . Beta measures the part of the asset's statistical variance that cannot be removed by diversification. Beta allows investors to assess a portfolio of securities and is a measure of the systematic risk of the security (Wikipedia, 2011). An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average. If the beta is greater than one, this would indicate the stock is more volatile than the market, whereas if the beta is less than one, meaning the stock is less volatile (Investopedia, 2011). Beta’s values are 1
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tied to the volatility of the market. If a security’s price is more volatile than the market, the beta value will be greater. If the movement is less than those of the market, the beta value will be less than, in addition a beta less than 1, reflects less risk and volatility to the investor. Beta was previously discussed.
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This note was uploaded on 02/26/2012 for the course FIN 102 taught by Professor Franks during the Spring '12 term at University of Phoenix.

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Week 4 Individual Assignment - Casa Bonita Memo To: Rainier...

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