Unit 7: Critical Assessment Forum

  

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Directions 

Peer Response

Within business, working professionals should become comfortable receiving and giving constructive feedback. Critical analysis of topics, and providing and receiving constructive feedback, is important in one’s professional growth and development and a core competency for leaders. You will be expected to read the initial posting of at least ONE peer or instructor, and then provide constructive criticism to their peers’ initial postings. You should highlight strengths as well as opportunities for improvement:

1. Point out what you perceived to be the strengths of the initial posting along with supporting rationale.

2. Identify specific opportunities for improvement with regard to the content in the initial posting. Furthermore, you should provide supporting rationale for your stated position, as well as concrete suggestions and guidance intended to strengthen the effectiveness of the content.

Each response should be a minimum of 250 words

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Directions 

Peer Response

Within business, working professionals should become comfortable receiving and giving constructive feedback. Critical analysis of topics, and providing and receiving constructive feedback, is important in one’s professional growth and development and a core competency for leaders. You will be expected to read the initial posting of at least ONE peer or instructor, and then provide constructive criticism to their peers’ initial postings. You should highlight strengths as well as opportunities for improvement:

1. Point out what you perceived to be the strengths of the initial posting along with supporting rationale.

2. Identify specific opportunities for improvement with regard to the content in the initial posting. Furthermore, you should provide supporting rationale for your stated position, as well as concrete suggestions and guidance intended to strengthen the effectiveness of the content.

Each response should be a minimum of 250 words


Laura Hanavan

SundayFeb 20 at 8:27am

Manage Discussion Entry

Beta is the number that shows investors how a particular stock acts compared to other stocks of a relevant index (The Investopedia Team, 2021). There are four important considerations to make when estimating beta, including “the time horizon used, the index used as a market portfolio, the method used to extrapolate from past betas to future betas, and the treatment of outliers” (Berk & DeMarzo, 2020, p. 445). The time period used can make a difference in the reliability of the beta. According to Berk & DeMarzo, the most common practice is using at least two years of weekly data or five years of monthly data. The index used can vary from S&P 500, NYSE Composite Index, the Wilshire 5000, or other markets that include a mixture of equities and fixed-income securities. It is important that the market risk premium used match the reflects the market proxy, for example if the proxy includes fixed-income securities a lower risk premium should be chosen (Berk & DeMarzo, 2020). Historical betas of a company may great vary over time, likely due to estimation errors. Individual stock betas should be considered, but industry average and adjusted betas are better datapoints. Outliers can and should be expected in any set of data. In this case, outliers are typically fluctuations in stock price due to extreme reactions or announcements. For example, an announcement of a new product, new leadership taking over, or a major company setback. This is also a reason why an industry or market average beta should be considered rather than that of an individual company.

The biggest limitation of forecasting a company’s beta is the use of historical data, it is less useful to investors who are attempting to predict the future stock movements (Kenton, 2021). Another potential limitation is if a company changes industries or adds a new industry though an acquisition, their historical data will no longer be accurate in the immediate future. While industry averages are encouraged (rather than individual company data), it is important for the company to perform thorough research to find like companies in their industry.

References

Berk, J., & DeMarzo, P. (2020). Corporate finance (5th ed.). Pearson Education.

Kenton, W. (2022). Capital asset pricing model (CAPM). Investopedia. Retrieved February 16, 2022, from https://www.investopedia.com/terms/c/capm.asp

The Investopedia Team. (2021). Using beta to understand a stock’s risk. Retrieved February 19, 2022, from https://www.investopedia.com/investing/beta-gauging-price-fluctuations/

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