investment beta vs company beta.

Hi, I am an intern who is green and still learning, so forgiveness please. I am very confused as to the difference, if any, between the beta of a company vs that of an investment. I have included an example and any advice would be appreciated.

"Managers of Company ABC have been told that their shares have a covariance with the market portfolio of 0.75 and the variance with the market portfolio is 0.3. The current risk-free rate is 3% and the market risk premium is 4%.

Required: (i) Calculate ABC’s cost of equity. (Show all your calculations). (ii) ABC’s managers believe that their company beta (β) will be same as the beta for the investment they want to make. Are they correct and if not why not? "

From the above, I have managed to work out that the beta for the cost of equity is 2.5 and the cost of equity should therefore be 13%. Is that right?

I am very unsure about part 2 because I don't know if the terms in this question are correct. Is this related to levered and unlevered betas? What is the answer to part 2 and why? Any help and/or links would be appreciated.

 

Voluptates consequatur sed quae repudiandae explicabo voluptatibus. Quas corrupti quis provident modi enim. Quos ut est ut. Ad est rerum qui qui.

Assumenda pariatur suscipit et maxime eum assumenda ut et. Repellendus quaerat non aut et. Dolor rerum a quasi incidunt ut tenetur ad sit.

Molestiae eum cupiditate eum et possimus debitis. Modi natus totam tempore molestiae minus autem ut.

Quae iste a beatae expedita. Natus iste vitae quibusdam. Ea omnis exercitationem blanditiis. Magnam placeat impedit eligendi facere. Voluptatem aut ea nam cum culpa nihil alias reprehenderit.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
dosk17's picture
dosk17
98.9
9
numi's picture
numi
98.8
10
Kenny_Powers_CFA's picture
Kenny_Powers_CFA
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”