Question

Do you think the following companies would have a high, low, or average beta? Explain your answer using references from the background readings and your knowledge of CAPM and beta:

The ACME Umbrella company’s stock goes up a lot when it rains, but goes down when it is sunny. Nothing else but the weather seems to impact ACME’s stock price.

Vultures, Inc., specializes in buying assets of bankrupt companies at a discount. Vultures’ stock price seems to go up whenever other companies are doing poorly and going bankrupt, but goes down when other companies are doing well and they have few bankrupt companies to prey on.

Unoriginal, Inc., can never decide what products they want to focus on so they make many different products in several different industries. They also invest much of their profits into 100 or so other companies that are listed on the stock exchange.

Answer 1

The Acme Umberella has a high Beta(>1) which means it is more volatile to the market. As it rains umberella sales will raise so its profits goes up.

Vultures, Inc., is having a negative beta. It reacts inverse to the market.If market is raising then companies will perform well .As Vultures, Inc., specializes in buying assets of bankrupt companies at a discount so it doesnt have customers. So negative beta companies are the companies which would indicate an inverse relation to the market.

Unoriginal, Inc., is having a stable beta of 1. So it follows market.

answered by: anonymous