Time Warner Beta Essay Example for Free

Time Warner Beta Essay Introduction – Definition of Beta Beta, which is represented by the Greek symbol, is also denoted as the Beta Coefficient and is identified as the slope of the linear regression of the portfolio in which within a specific period or point served as benchmark. (Risk Management,) Beta is the assessment of the market risk or ‘volatility’ of the stock. With this, it may help investors to make the right decisions when investing stocks because of some fluctuations in price of the stocks. (Beta: Gauging Price Fluctuations, July 29, 2005) Volatility which is the measure of the uncertainty or risks accompanied in investing due to fluctuation of the prices is determined its relativity by approximating its Beta. Volatility is associated with security’s value which means that when the investment is said to having a higher volatility, there is a bigger potential of security’s value for expansion over a larger range. Thus implying that within a shorter period of time, price of the security can vary significantly. On the contrary, a lower volatility insinuates that the fluctuation in security’s value is unnoticeable; however there are small alterations of the value within a stable range of time. (Volatility,) With that, Beta being the measurement of volatility, it offers meaningful significance to the market risk compared to the greater market. Furthermore, Beta is used for comparison along with the other stock, estimating the overall volatility of the return of the security in contradiction of the return in the market. Computation of Beta ÃŽ ²   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In investment and finance, Beta is the connection or the coefficient of a portfolio or an individual stock in contrast to the market all together. So as to compute for the beta, the regression analysis is used. The Beta of an asset is calculated using the formula: where in, ra is the gauge of yield profit of the asset; and rp is the evaluation of the rate of the yield profit of the portfolio of which the asset is a component. (Beta Coefficient,) Furthermore, the cost equity of a company can be projected using the Capital Asset Pricing Model in which the operation of equity beta of the company and again, equity beta is the operation of both the weight and asset risk. This is calculated using the formula: where in, KE is the cost of equity of the company, RF is the rate of return on a risk free investment also known as the risk-free rate, RM is the market portfolio return, and ÃŽ ²E is the equity beta which is computed: which is derived from this formula: , and the formula of a Firm Value (V) Firm Value (V) = Debt Value (D) + Equity Value (E)(Beta Coefficient,)   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Applying this entire concept in chosen business which is the Time Warner, the world’s largest media company, had beta of greater than 1 which indicates that the price of security will be more volatile than the market. This means that the investors accept the additional risk accompanied to attain the possibility of more rewards. The Time Warner had a fixed exchange rate during their merger with the AOL. The conditions contain include the 1.5 shares of AOL Time Warner would be given to the Time Warner for each share their stock and America Online shareholders will get one share of AOL Time Warner stock for every share of stocks that the America Online owns.(Dignan, 10 Jan 2000 ) Using the Charts in Beta, investors could observe the fluctuations and changes in the charts, its opening, closing prices and the high and low points in a specific period of time (Time Warner Inc.,). References Beta Coefficient [Electronic Version]. Retrieved May 23, 2007 from http://www.answers.com/Beta. Beta: Gauging Price Fluctuations [Electronic (July 29, 2005). Version]. Retrieved May 23, 2007 from http://www.investopedia.com/articles/01/102401.asp. Dignan, L. (10 Jan 2000 ). AOL, Time Warner tout broadband future, synergy [Electronic Version]. Retrieved May 23, 2007 from http://news.zdnet.co.uk/itmanagement/0,1000000308,2076198,00.htm. Risk Management [Electronic Version]. Retrieved May 22, 2007 from http://www.tradetrek.com/Education/risk_management.asp. Time Warner Inc. [Electronic Version]. Retrieved May 24, 2007 from http://finance.yahoo.com/charts#chart1:symbol=twx;range=1d;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined. Volatility [Electronic Version]. Retrieved May 23, 2007 from http://www.answers.com/volatility.