Question

identify two firms one with a beta more than 1.5 and another with a beta of less than 0.7. Report your findings by naming the firms and their betas, describing their products, and explaining why you believe the beta seems predictable (or perhaps not predictable) for the firms chosen.

Answer 1

The two firms that I have identified are:

(1): Advanced Micro Devices, Inc. This firm has a beta of 2.30 (i.e. > 1.50). Advanced Micro Devices is a semiconductor company whose main products are computer processors, graphics products, software and technology, gaming products, etc.

(2): American Water Works Co., Inc. This firm has a beta of 0.27 (i.e. < 0.70). American Water Works is a public utility company that focuses on water and waste water. The company provides clean, safe and reliable water supply in America.

We know that beta of a stock is a measure of the stock’s volatility in relation to the market. Advanced Micro Devices, Inc. has a beta of 2.30 and this means that if the market changes by 10% then the stock of Advanced Micro Devices will change by (10*2.3) 23%. So if the market goes up by 10% then Advanced Micro Devices’s stock will go up by 23%. The reason for this company’s high beta is that the fortunes of the company are tied up with the state of the economy. During periods of economic boom demand for computers and hence computer related products like processors, graphics products, software and technology, gaming products etc. will be high. Thus when the market increases due to favorable economic conditions the stock of Advanced Micro Devices will stand to gain more due to the nature of its business and the fillip that its business will receive due to favorable market and economic conditions.

On the other hand American Water Works Co. has a very low beta of 0.27. This means that this company’s stock will be less volatile and the stock movement will be 27% of the index’s movements. The business of American Water Works Co. is largely an insulated business and hence will remain unaffected by external factors like state of the economy, interest rates, inflation rates etc. Its main product i.e. supply of water will always have a consistent demand even if there is a boom or a recession in the market. This nature of its business ensures low volatility in its earnings and its stock price and hence the stock of American Water Works Co. has a low beta.