Investment Portfolio the Beta Coefficient for Google, Essay

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Investment Portfolio

The beta coefficient for Google, Inc. is 1.03 using the Excel Slope function (Christensen). Using the S&P 500 as a benchmark, this beta coefficient has a higher risk than the market (Christensen, How to Interpret a Beta Coefficient). With this stock included in a portfolio, it would need to be diversified with less riskier investments in order to balance the overall portfolio risk and return on investment aspects of the portfolio. Because the Google stock is at a higher risk, it could bring higher returns.

Using a CAPM calculator (Chimp), the cost of capital for Google, Inc. is 6.76%. The CAPM is a capital asset pricing model used to determine the cost of equity. The cost of equity is the return that stockholders require for a company and represents the compensation the market demands in the exchange for owning the asset and bearing the risks of ownership (Investopedia). The cost of equity is what is used to determine whether owning the stock is worth the risk involved to purchase it. If the return is extremely low, investors would probably consider other stock that would provide more adequate returns for their investments.

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But, if the return is rather high, it could be diversified with alternative investments to make the risks involved with the stock worth considering as part of the investment portfolio.

The beta for Yahoo is 0.9 and for Microsoft is 1.06 (Yahoo). With Google, Inc. having a cost of equity of 6.76%, Yahoo a 6.3%, and Microsoft a 6.62%, the expected rate of return would be an average of 6.56%. A portfolio that includes just the three stocks would still be a very high risk portfolio. Even though there is a high rate of return, the risks are very high as well. With Google's beta at 1.13, the average beta would be 1.03, which is still more volatile than the market and at a higher risk than the overall market.

A portfolio needs to be diversified with stocks from different industries, companies of different sizes, and include different asset classes, such as bonds, cash, real estate, and other alternative investments (Little). Google, Inc.,….....

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