What is the estimated beta coefficient of zbb Energy Corp? What does this beta mean in terms of your choice to include this company in your overall portfolio? Given the beta of my company (?), 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 your company? Explain what is the meaning of the 'cost of equity'. Choose two other companies Wal-Mart and CostCo, look up their "Beta" and report the names of these companies and their betas. Suppose you invest one third of your money ($1,000) 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?
Urgency: LOW
The beta of ZBB Energy is 1.28. Beta is used to show the relationship of return on selected stock as compared to market rate of return. If the market rate of return is 10%, it is expected that the return on this stock will be 1.28 times of 10%, it means that expected return will be 12.8% form this stock. If 33% of portfolio has been invested in the ZBB, its contribution will be .33*12.8^ = 4.22%
Rate of return according to CAPM
4.5%+*1.28*6.5% = 12.82%
http://www.nyse.com/about/listed/lcddata.html?ticker=ZBB
Beta of WMT = .31
Expected return = 4.50% +.31 *6.5% = 6.58%
http://www.nyse.com/about/listed/lcddata.html?ticker=WMT
Beta of CostCo = .74
Expected return = 4.50% +.74 *6.5% = 9.31%
http://www.nyse.com/about/listed/lcddata.html?ticker=COST
Portfolio Beta = 1.28+.31+.74/3 = .78
Expected return of portfolio = 4.5% +.78 *6.5 = 9.57%