Question

1) What is beta and how do you interpret it. (i.e Apple has a beta of 1.43, what does that mean?)

2) Could you calculate the component cost of equity for a stock with nonconstant expected growth rates in dividends if you didn't have the information necessary to compute the component cost using the CAPM? Why or why not??

Answer 1

Question 1

Beta is a measure of non-diversifiablerisk (Systematic Risk). It measures the sensitivity of the stock with reference to market index. Beta of 1.50 means the stock is 50% riskier than the market. Beta of .71 indicate that the stock is 29%(100-71) less risky than the index. If the stock market changes by 1%,a stock of beta .71 should change by 1*.71 = .71%. Since the beta is positive direction of change will be same. That is if the market goes up, then stock will also goes up.

i.e Apple has a beta of 1.43 means the stock is 43% riskier than the market.

Note: As HOMEWORKLIB RULES guidlines we are mandated to answer only first question