(Related to Checkpoint 8.3) (Systematic risk and expected rates of return) The f
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Question
(Related to Checkpoint 8.3) (Systematic risk and expected rates of return) The following table, BEBcontains 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? iput the expected increase ithe value of each firm's shares ifthe market portfolio were to ncrease by 10% (Round each answer to two dermal paces) Microsoft Money Central (MSN.com) Beta Estimate Company Expected Increase Computers and Software Apple Inc. (AAPL) Dell Inc. (DELL) Hewlett Packard (HPQ) 2.58 1.37 1.47 % Utilities American Electric Power Co. (AEP) 0.73Explanation / Answer
Beta represents the tendency of a security's returns to respond to swings in the market.
A beta of 1 indicates that the security's price moves with the market.
A beta of less than 1 means that the security is theoretically less volatile than the market.
A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market.
For example, if a stock's beta value is 1.3, it means, theoretically this stock is 30% more volatile than the market.
By multiplying the beta value of a stock with the expected movement of an index, the expected change in the value of the stock can be determined.
1
Expected increase in value of each firm's share if market portfolio were to increase by 10%
If the market portfolio were to increase by 10%, among the Computer and software firms, the stock price of Apple Inc is expected to increase the maximum while among the Utilities, the stock price of Centerpoint energy is expected to increase the maximum.
2
Expected decrease in value of each firm's share if market portfolio were to decrease by 10%
Beta
If the market portfolio were to deccrease by 10%, among the Computer and software firms, the stock price of Apple Inc is expected to decline the maximum while among the Utilities, the stock price of Centerpoint energy is expected to decline the maximum.
3
The set of firms under the Computer and software category have the most variable or volatile stock returns as compared to set of Utility firms as the beta of the computer and software firms are higher in comparison to those of the utility firms.
A high beta is often a pointer for a risky or growth stock, while a low beta is traditionally associated with "safer" stocks, such as utilities.
Company Beta % Expected Increase Computer and Software Apple Inc 2.58 10% 2.58*10% = 25.8% OR 26% Dell Inc 1.37 10% 1.37*10% = 13.7% OR 14% Hewlett Packard 1.47 10% 1.47*10% = 14.7% OR 15% Utilities American Electric Power Co. 0.73 10% 0.73*10% = 7.3% OR 7% Duke Energy Corp 0.56 10% 0.56*10% = 5.6% OR 6% Centerpoint Energy 0.91 10% 0.91*10% = 9.1% OR 9%Related Questions
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