Going through the M&I guide, and one of the questions is if we should factor dividend yield into the cost of equity equation. The answer states, that dividend yield is already factored into Beta, because Beta describes returns in excess of the market as a whole, and those returns include dividends.
-Isn't Beta a measure of stock riskiness and alpha is the excess return on the investment? So how is dividend yield factored into the cost of equity equation already?
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The price of a stock is the measure of the companies future cash flows. By that logic, Beta (compared against the stock market) should already factor in dividend yield. I'm not entirely sure if that's the right answer, but it makes sense to me.
Well at it's core beta is a representation of the price performance of a security relative to some market index. In theory, a stock with a higher dividend yield would be less risky than one without as losses are naturally offset partially by the receipt of a dividend. Therefore, this will be represented in the price of a security which will be represented in beta.
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