Introduction to Corporate Finance

(avery) #1
Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition

V. Risk and Return 13. Return, Risk, and the
Security Market Line

(^460) © The McGraw−Hill
Companies, 2002
Portfolio Betas
Earlier, we saw that the riskiness of a portfolio has no simple relationship to the risks of
the assets in the portfolio. A portfolio beta, however, can be calculated, just like a port-
folio expected return. For example, looking again at Table 13.8, suppose you put half of
your money in Exxon and half in America Online. What would the beta of this combi-
nation be? Because Exxon has a beta of .80 and America Online has a beta of 1.65, the
portfolio’s beta, (^) P, would be:
432 PART FIVE Risk and Return
Suppose you wantto find the beta for a company like Amazon.com.
One way is to go to the Web. We went to finance.yahoo.com, entered
the ticker symbol AMZN for Amazon, and followed the “Profile” link. This is
the result.
The reported beta for Amazon.com is 3.23, which means that Amazon has over
three times the systematic risk of a typical stock. You would expect that the company
is very risky, and, looking at the other numbers, we agree. Amazon’s ROA is 54.23
percent. This effectively means that the net loss for the past year was one-half of assets.
If you look at ROE, you will see that the number is not reported. Why? If you calculate
the ROE using the earnings per share and the book value per share you will find that
ROE is almost 84 percent, which would be considered great. But digging deeper, the
reason ROE is so good is that Amazon has a negative book value. So, when you calcu-
late ROE for Amazon, the more the company loses, the higher the ROE becomes—not
a good situation! Amazon appears to be a good candidate for a high beta.
Work the Web

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