1. What\'s the difference between Standard Deviation and Beta? 2. Please provide
ID: 2750404 • Letter: 1
Question
1. What's the difference between Standard Deviation and Beta?
2. Please provide a few examples of systematic and unsystematic risk factors that are impacting your retirement portfolio (if you don't have one, imagine you have one)?
3. Go to the web and research for the beta of Apple and HP. What's your understanding of these betas?
4. When talking about cost of capital, it is said that required return is the same than cost of capital. How's that (one is return and the other one is cost)?
5. If a company's D/E equity ratio is 1/2, what are the corresponding weights for Debt and Equity?
6. Dividends....would you prefer your stocks to pay dividends or would you rather earnings are reinvested into the company? Why?
7. Why are taxes are applied to cost of debt (to get after-tax cost of debt) but taxes are not applied to cost of equity?
Explanation / Answer
1. Standard deviation is measure of total risk while beta is measure of systematic risk. In other words standard deviation measures the risk of individual stock while beta measures the risk of portfolio as whole.
2. Suppose I have invested in tecnology for my retirement portfolio. A wrong survey by technology company is an example of unsystematic risk. Another example: Supppose I have invested in two companies lets say A and B. There is a chance that upcoming governent would impose new laws which would either benefit company A and prohibit company B or benefit company B and prohibit company A. Unsystematic risks can be diversified by investing in diverse companies (in companies A and B simultaneously for this example).
Example of syatematic risk is change in macro economic factors. For example labour strikes.
3.Beta of AAPL: .99
Beta of HP: 1.45
Beta of HP is higher than that of Apple. This means that stock of HP is more volatile and hence riskier (systematic risk) and investors would require higher return to compensate for the same.
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