Question

The monthly closing stock price (adj for stock splits) is taken for the period April 2015...

The monthly closing stock price (adj for stock splits) is taken for the period April 2015 till April 2020 for Company A and B and the results are given below.

# Company A Company B
Standard Deviation
8.021841707%
5.276555644%
Beta
1.124571405
0.885907312

1. Which company is riskier given the standard deviation measure you calculated above?

2. Estimate beta for each company (This one is done above)

3. Which company is riskier given the calculated beta?

4. What is the difference between the two measures of risk ( standard deviation & Beta).

5. Estimate the cost of equity of Apple. Use a market risk premium of 5.4% & a risk free rate of 2.1%.

6. Estimate the cost of equity of Microsoft. Use a market risk premium of 5.4% & a risk free rate of 2.1%.

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Homework Answers

Answer #1

1. Company having highest standard deviation is riskier, that is company A it is having the highest SD of 8.022%

2. Already did it in question

3. Company having highest Beta is riskier, that is company A, it is having the highest beta of 1.1245..

4. Beta and Standard deviation are risk of return . while Beta measures the stocks volatility relative to market as a whole, Standard deviation measures the risk of individual stock

5. Cost of equity = Rf + Beta*market risk premium

Cost of equity = 2.1% + 1.12457140 * 5.4 =8.17268556 % = 8.17%  


6. Cost of equity B= 2.1% + .885907312 * 5.4 = 6.883899485 % = 6.88%

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