Systemic Risk of Coca Cola

Topics: Investment, Modern portfolio theory, Finance Pages: 2 (419 words) Published: September 16, 2012
Module 3 SLP
a) In arriving at beta one uses systematic and unsystematic risk. Systematic risk is one which can be eliminated by diversification and this are for securities of specific investments Unsystematic risks can not be eliminated by diversification and these include interest rates and tax (Brigham, 2005) β = Systematic risk

Market risk
= 7.75 ÷ 4.5 = 1.723
The beta for Coca Cola Company is 1.723( measures the unsystematic risk of a firm under analysis. Beta can be derived from sensitivity analysis. This beta can increase the risk of investor’s portfolio as it is more than 1 as compares to the market risk. Beta measures the responsiveness of the returns in the market. The higher the beta the aggressive the share prices(Wood,Donald,2000). The beta of the Coca cola company is higher and the market is stable therefore the portfolio will have higher returns. a) Rp = Rf + (Rm – Rf)

Rf – 4.5%
(Rm – Rf) – 6.5%
Therefore β=1.723
Rk = 4.5 + (6.5) x 1.72
= 15.68%
Cost of equity is that opportunity cost which shareholders are willing to pay for those shares. It is the cost of raising new share capital. b) Two companies –
i) International Business Machine (IBM) β = 1.7302 ii) Microsoft Corporationβ – 1.71
Beta for portfolio
βp = 1/3 x 1.71 + 1/3 x 1.72+1/3 x 1.73 = 1.72
Rp rate for port= 4.5+(6.5)+ β
= 15.68
Security return beta slope
Market returns The portfolio does not sufficiently diversify because it has a higher unsystematic risk of 9.2%, while the market risk is 4.5%. The riskier the investment the higher the return for that investment (Weaver, Weston, 2001). From the graph above the higher the change in the market return, the security rate responds with a greater change therefore while investing in a portfolio,...
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