You only multiply by 10 to get your answer if Im correct? For both parts? (Relat

Question

You only multiply by 10 to get your answer if Im correct? For both parts?

(Related to Checkpoint 8.3) (Systematic risk and expected rates of return) The following table, contains beta coefficient estimates for six firms. Calculate the expected increase in the value of each firm's shares if the market portfolio were to increase by 10 percent. Perform the same calculation where the market drops by 10 percent. Which set of firms has the most variable or volatile stock returns? Input the expected increase in the value of each firm's shares if the market portfolio were to increase by 10%. (Round each answer to two decimal places.) Microsoft Money Central (MSN.com) Beta Estimate Company Expected Increase Apple Inc. (AAPL) Dell Inc. (DELL) Hewlett Packard (HPQ) Computers and Software 2.67 1.39 1.49 26.70% 13.90% 14.90% Utilities American Electric Power Co. (AEP) Duke Energy Corp. (DUK) Centerpoint Energy (CNP) 0.63 0.45 0.91 6.30% 4.50% 9.10%

Explanation / Answer

Yes correct. In order to find the respective increase or decrease in the return of the stocks we will multiply it with 10 which is the percentage increase or decrease in market conditions. This is due the fact that a well diversified stock moves as percentage change in market times its Beta. Thus, if the market increases by 10% and a stock has a beta of 2.67 then the Stock will increase by 26.7% (2.67*10).

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