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Q: cost of equity ( Answered,   1 Comment ) Question
 Subject: cost of equity Category: Business and Money > Finance Asked by: bladehulk-ga List Price: \$14.00 Posted: 19 Nov 2006 21:22 PST Expires: 19 Dec 2006 21:22 PST Question ID: 784164
 ```williams NYSE -0.05 -0.12 0.05 0.01 0.08 0.06 0.15 0.10 0.10 0.05 a. What are the average returns on williams stock and on the market? b. Compute the beta of Williams stock.``` ```Hi!! a. Calculate the average return for Williams stock and the market. This is the easy part: AvRW = (-0.05 + 0.05 + 0.08 + 0.15 + 0.10) / 5 = = 0.066 AvRM = (-0.12 + 0.01 + 0.06 + 0.10 + 0.05) / 5 = 0.02 The average return on Douglas stock is 6.6% and average return on market is 2%. b. Compute the beta of Williams stock. The beta is the covariance between the stock's return and the market's return divided by the variance of the market return: Beta = Cov(AvRW,AvRM)/Var(AvRM) Cov(AvRW,AvRM) = Sum[(RD-AvRD)*(RM-AvRM)] = = [-0.116*(-0.14)+(-0.016)*(-0.01)+0.014*0.04+ +0.084*0.08+0.034*0.03] = = 0.0247 Var(RM) = Sum[(RM-AvRM)^2] = = [0.0196+0.0196+0.0016+0.0064+0.0009] = = 0.0286 Beta = 0.0247 / 0.0286 = 0.86364 The beta of Williams stock is 0.86364 . For references see: "Beta coefficient - Wikipedia, the free encyclopedia": http://en.wikipedia.org/wiki/Beta_coefficient Search strategy: beta covariance I hope this helps you. Feel free to request for a clarification if you need it. Best regards, livioflores-ga``` ```pls. explain further each data ( where they came from ) of solution b. Beta = Cov(AvRW,AvRM)/Var(AvRM) Cov(AvRW,AvRM) = Sum[(RD-AvRD)*(RM-AvRM)] = = [-0.116*(-0.14)+(-0.016)*(-0.01)+0.014*0.04+ +0.084*0.08+0.034*0.03] = = 0.0247 Var(RM) = Sum[(RM-AvRM)^2] = = [0.0196+0.0196+0.0016+0.0064+0.0009] = = 0.0286``` 