Analysis of Correlation and Beta of Walmart

Subject: Business
Type: Analytical Essay
Pages: 11
Word count: 3098
Topics: Walmart, Data Analysis, Finance, International Business, Management
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Introduction

It can be acknowledged that Walmart is one of the largest retail cooperation’s in the world. This company goes by the official name ‘Wal.Mart Stores, Inc’ and operates a number of hypermarkets, grocery stores, and discount department stores across the globe. The company was founded by Sam Walton in the year 1962 and later on got incorporated in the year 1969. Its headquarters are located in Bentonville, Arkansas. It is true to state that the company has over 11,000 clubs, as America (USA), and Canada, the company operates under the name Walmart. 

In Mexico, the company operates under the name Walmart del Mexico, as Asda in the United Kingdom (UK), and as the Seiyu Group in Japan. It is also important to note that the company has owned operations in several other countries not mentioned above and they include; Brazil, Chile, and Argentina. It cannot be disputed that so far, Walmart is the largest company by revenue and this can be evidenced by the global ranking list that was released by Fortune Global 500 in the year 2016 that valued the company’s revenue to more than $470 billion as at the time the report was being released (Quinn, 2005). The company is also one of the largest private employers in the world having employed close to 2.4 million people. Since it is controlled by the Walton family, the company is a publicly-traded family owned business. 

Through the holding company referred to as Walton Enterprises along with their individual holdings, Walton’s heirs own more than 50% of the company. Walmart is so far one of the most valued companies in the global market, as well as, being the largest grocery seller in the US. It first debuted in the US stocks exchange in the year 1972, however, 16 years down the line became the most profitable retailer in the country. 1 year later, the company had become the largest retailer in the country in terms of revenue. When it started its operations, it was geographically limited to the Midwest and the South of the country, however, due to its rapid expansion in the early 1990s, the company managed to establish its stores from coast to coast. It can, however, be aid that the company’s investments outside America and Canada have had mixed reactions for example, its operations in the United Kingdom (UK), China, and South America have been successful, howler, its operations in South Korea and Germany have failed miserably. 

This particular paper is an analysis, as well as, the calculation of the required rate of return within the CAMP and DMG frameworks on Walmart. It includes the analysis of Beta for the company by calculating it on a year to year basis so as to look into the trends of the company, as well as, define its potential determinants. This papers will do this by establishing the following; defining CAPM and DGM, establishing what is beta and its role, presenting the Walmart, analyzing beta for the company and comparing it to other competitors/industry, reporting and interpreting the descriptive statistics of return rate along with the risk measures (mean, standard deviation, variance, coefficient of variation, correlation where; there will be the calculation of rate of return using CAPM model and the calculation of growth rate of earnings  used in the DGM and finally the calculation of required rate of return using DGM model. 

Capital Asset Pricing (CAPM)

Capital asset pricing is a model used in finance used to identify a theoretically appropriate rate of return for any particular asset, thus, help in the making of appropriate decisions, for example, the decisions of whether to or not to add more assets to a company, thus, further diversify its portfolio (Blume, 1973). It can be acknowledged that the model works by taking into account the asset’s sensitivity to the non-diversifiable risk in a phenomenon referred to as market risk or systemic risk and this is often represented by beta β.  It is also important to note that it also takes into account the expected return rate of the market and the expected return rate of the risk-free asset. It can be acknowledged that the capital asset pricing takes the assumptions of any particular form of utility function. 

This means that a risk is measured using a variance, for example, a utility famously referred to as the quadric. On the other hand, the risk can be measured using other asset returns that that have a completely described probability distribution using the first 2 comments, for example, the 0 transaction cost or the normal distribution. In the above-described situation, the Capital asset pricing is a model will show that the cost of any equity capital will only be determined by β (Brennan, 1989). It was first introduced the year 1962 by Jack Treynor with the intention of being used to improve the field of finance and accounting. It can simply be defined as a model that helps those in the field of finance and accounting easily price an individual portfolio and security. 

When it comes to pricing individual securities, security market lines are used and are related to the expected symmetric risk β to show how individual security risks are classed in relation to the security risk. It is important to use the security market lines because they enable an individual calculate the reward-to-risk-ratio for any particular ratio to that that is in the entire market.  It is important to note that when a coefficient deflates the expected rate of return of any security, then the reward-to-security ratio of an individual security will be equal to the reward-to-risk ratio of the market as represented bellow; 

ERi-Rfβi=ERm-Rf

ER1=Rf+βiERm-Rf

is the formula for obtaining the capital aset pricing model

The Dividend Growth Model (DMG)

Just like capital asset pricing model, the dividend growth model is a valuation model that is mainly used to calculate the value of the existing stock. It can be acknowledged that dividend growth model takes into account the assumption that dividends grow at a different rate during the period the period at hand or at a stable rate of perpetuity (Barnes). It mainly serves to identify whether the stock that a company has is either undervalued or overvalued. However, it can only do this if it assumes that the company expected dividends grow at a value abbreviated as ‘g’. This value g is subtracted from the required rate of returns which is usually abbreviated as k or (RRR). It is important to note that the stable dividend growth model formula is responsible for calculating and arriving at the fair value of stock and it appears as such;

p=D1(k-g)

It is important to note that the stable multistage dividend growth equation model takes the assumption that dividend growth g is not stable in perpetuity, however, after a particular stage grows at a constant stage. It is important to state that the model is also referred to as the Gordon growth model and it has a number of advantages. This particular model enables investors to identify the value of stock and this is exclusive of the prevailing conditions in the market. This enable investors to make a good comparision between various companies within different industries, thus, choose on the most appropriate one. It is because it sums up to be one of the most effective tools of any investor that this model is one of the most widely used models for valuation and equity analysis. It is, however, important to note that there are concerns among a few that because this particular model excludes all the non-dividend factors, it tends to give a low value to the stock of companies with customer loyalty, exceptional brand names, special intellectual property, or any other form of a value enhancing characteristics that are non-dividend in nature. 

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It is true to state that 2 circumstances need to occur so as to make the dividends growth model effective and these include; a company needs to distribute its dividends and the assumption that the dividend growth rate (g) does not exceed the investors return rate (k). It is important to note that growth rate g is greater than the investor return rate (k) the result will be that of a negative value, note that stock cannot have a negative value. This particular model often requires individuals to make difficult, as well as, unrealistic estimates on the (g), which is the dividends growth rate. The model is very sensitive and responds very fast to any changes in growth rate, as well as, the investor return rate. It is because of this particular reason that many analysts perform a sensitivity analysis s as to determine how the valuation is affected by different assumptions. According to the model, stock becomes more valuable only if its own dividends increase and the required rate on investor returns decreases, therefore, it can be concluded that the model stands with the fact that the price of stock grows at the same rate as the dividends do. 

Beta (β) and its role

When it comes to finance, beta is used as an investment indicator that indicates whether an investment is less or more volatile than the general market. In general terms, when the value of beta is less than 1, it indicates that the investment is less volatile than the general market, on the other hand, when beta is larger than 1, it indicates that the investment is more volatile than the general market. It is important to note that volatility is stated to be the standard deviation, that is, the price around the mean. In advanced financial activities, beta is usually considered to be the risk that originates from being exposed to the general market as opposed to the existing idiosyncratic factors (Ross, 2002). 

It is important to note that all the investable market assets usually have a beta that is equal to 1. There are usually 2 types of scenarios whenever a better appears to be below ne and these scenarios include; an investment has a lower volatility than the market or there is a volatile investment and the movement of its price does not correlate with the market. When the value of beta is greater than 1 indicates that the asset is both volatile and it moves up and down in a similar way as the market does. If this is applied in our scenario with Walmart, a negative beta will only be possible a type of investments that go down when the market goes up, that is the opposite. It can be acknowledged that only a few fundamental investments have significant, as well as, consistent negative betas, however, some derivate may have large betas that are negative. 

Beta plays a very significant role because it helps financial analysts measure the risk of any investment that diversification cannot help reduce it. Investments held on a stand-alone basis’s risk cannot be measured using beta, however, the amount of risk the stand-alone investment adds to a company can be measured using beta. When it comes to the capital asset pricing model, the risk beta is the only risk which investors a higher expected return than the existing risk-free rate of interest. Diverting away from the definition of a theoretical beta, it is important to acknowledge that the term beta is used in various other ways in finance, for example, it is quoted and used in the analysis of funds to measure risks that are associated with the benchmarks of the funds instead of to the exposure of the general market portfolio. It is important to note that the term beta decay implies to a scenario in which a company which previously had a beta value greater than 1 to have its beta decline to that of the market. The most common expression for β is indicated below;

β=Cov(ra, rb)Var(rb)

Where Cov is the covariance and the Var is the variance operator.

It can be acknowledged that beta is used in the capital asset pricing model whose main function is to calculate and identify the expected return of a particular asset and this is based on the expected market returns, as well as, the assets beta. It is true to state that it is calculated using the regression analysis where beta represents the tendency of a security’s returns to respond easily to any changes in the market. It can be acknowledged that the beta of a security can be arrived at by dividing the covariance of a securities returns and the variance of the benchmark returns. 

Beta is used in a very unique way, for instance, a security’s beta should only be put into use when the R square of a security, that is, the percentage of a security’s historical price, in relation to the already existing benchmark. It can therefore be stated that beta is a very important metric used for the evaluation of the trading tendencies of stock. It is, however, important to note that there exist utility stocks and these usually have a beta value of less than 1, that is β<1. Such a phenomenon indicates that the security is less volatile from a theoretical point of view as a beta value greater than 1, that is β>1 from a theoretical point of view indicates that the price of the security is more volatile than that of the general market.

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The Company Presentation

Wal.Mart Stores, Inc’ operates a number of hypermarkets, grocery stores, and discount department stores across the globe. The company was founded by Sam Walton in the year 1962 and later on got incorporated in the year 1969. Its headquarters are located in Bentonville, Arkansas. It is true to state that the company has over 11,000 clubs, as America (USA), and Canada, the company operates under the name Walmart. It is the largest company by revenue and this can be evidenced by the global ranking list that was released by Fortune Global 500 in the year 2016 that valued the company’s revenue to more than $460 billion as at the time the report was being released. 

The company is also one of the largest private employers in the world having employed close to 2.5 million people. Since it is controlled by the Walton family, the company is a publicly-traded family owned business. Walton’s family owns more than 50% of the company. Walmart is so far one of the most valued companies in the global market, as well as, being the largest grocery seller in the US. It first debuted in the US stocks exchange in the year 1972, however, and in 1988 it became the most profitable retailer in the country (Courtemanche, 2011). 1 year later, the company had become the largest retailer in the country in terms of revenue. When it started its operations, it was geographically limited to the Midwest and the South of the country, however, due to its rapid expansion in the early 1990s, the company managed to establish its stores in a majority of parts in US. 

Walmart’s Beta Analysis

It can be acknowledged that beta is one of the most fundamental measures of a market’s volatility. It can be considered to be a markets elasticity or sensitivity. It is a figure that shows the relationship between the financial market and the financial instruments in which this particular instruments are traded. Let us take this particular instance, when an equity’s beta is greater than 1, that is, it is equal to a value like 2, it is expected to underperform the market is going down and outperform the market when the market is going up. It is also important to note that when the value of beta is equal to 1 it implies that both the asset and the market will generate similar returns over time. According to the data collected, it can be acknowledged that Walmart’s beta from 3 different sources appears as below;

  • beta (author calculation-daily data)=0.55
  • beta ( Yahoo Finance)=0.06
  • beta (reuters.com)=0.33

Taking the beta value that was arrived at by Yahoo finance, the formula for achieving this particular value appears as below;

Walmart beta=covariancevariance=0.06

To sum this up, it is important to state that beta is the measure of the individual stock risk held relative to the volatility of the market in general. It can be acknowledged that it is calculated in accordance to the capital asset pricing model, however, it is important to note that since beta is calculated according to the historical price movements it makes it difficult to predict how a company’s stock will perform in the near future. It is also important to compare the above presented beta values with the beta value published in Walmart’s website and according to their financial statements, the store has a beta value of 0.06. It is important to note that this beta value is much higher than the beta value of the consumer sector and even much higher than the beta value of the wholesale and retail industry. It implies that the beta for all the stocks is over 1000% lower than that of Walmart. 

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The rate of return using the CAMP model

From the calculations in the attached excel files, Walmart’s historical rate of return is 5.27%. It is also important to state that from the calculations in the excel file attached the expected rate of return calculated from CAMP is 8.77%. With this capital asset pricing value, investors can be compensated in 2 major ways time value over money and risk. It can be acknowledged that time-value of money is represented by the (rf) in the formula applied (Jensen, 1972). 

Did you like this sample?
  1. Barnes, Paul. “Dividend Growth Model.” Wiley Encyclopedia of Management.
  2. Blume, M. E., & Friend, I. (1973). A new look at the capital asset pricing model. The journal of finance28(1), 19-34.
  3. Brennan, M. J. (1989). Capital asset pricing model. In Finance(pp. 91-102). Palgrave Macmillan UK.
  4. Courtemanche, C., & Carden, A. (2011). Supersizing supercenters? The impact of Walmart Supercenters on body mass index and obesity. Journal of Urban Economics69(2), 165-181.
  5. Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests.
  6. Quinn, B. (2005). How Walmart Is Destroying America and the World: And What You Can Do About It. Random House Digital, Inc..
  7. Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (2002). Corporate Finance.
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