Question

Question

Question

Question 1

There are many tools used for choosing stock investments, P/E, price, insider trading and so on, one tool to be looked at is the stock's Beta coefficient. Basically speaking, a stock's Beta Coefficient is defined as a measure of it's volatility, or risk, as compared to the market as a whole. Sometimes it is called the beta weight.

Every stock has a beta coefficient and by quick glance it can tell you a little about the stock. Some things to remember first though is that cash has a beta of 0, there is no risk whatsoever in owning cash. Markets, or exchanges, have a beta coefficient value of 1. All markets have this beta coefficient.

Now say you are looking into buying a certain number of shares of say, Rollins Inc (ROL). Rollins is traded on the New York Stock Exchange (NYSE). We already know that the exchange beta is 1. Rollins stock has a beta coefficient of .57, which means at first glance that this stock has less risk than the exchange as a whole. Almost half as much. Now if the NYSE as a whole ends the day up ten percent, (a huge amount in the real world, but used for easy learning) than you can guess that Rollins will rise 5.7%. Conversely, if the NYSE falls ten percent, this stock will also drop 5.7%.

Now, Research in Motion (RIMM) is traded on the Nasdaq Exchange. It has a beta coefficient of 1.68 as compared to the exchanges beta of 1. This means that this stock is riskier than the exchange as a whole. How much riskier? 68% riskier. If the exchange rise the same ten percent as the previous example, this stock should rise 16.8%. The same is true for the drop in price for both exchange and stock.

Another point to remember is that most utilities have a beta of less than one, while tech stocks are more than one. So what does all this mean? You as an investor have a risk tolerance or threshold, the beta coefficient will allow you at first glance to see if the stock you are looking to buy is in your threshold. I myself will lose sleep if a stock is riskier than 1.75, my tolerance level will not allow me to even look at a stock above that mark.

An investor must also remember that beta is a general rating for a stock. It does not take into effect what happens on the day to day basis of the company it is attached to. Stocks have moved opposite of their markets based on announcements, insider trading, lawsuits, and so on. The beta coefficient is not the only tool for choosing stocks, but it is helpful for a general overview of the potential investment.

Question 2:

There are two basic ways of financing for a business: debt financing and equity financing. Debt financing is defined as “borrowing money that is to be repaid over a period of time, usually with ...