Question

The stock of Static Corporation has a beta of 0.9. If the expected return on the market increases by 5%, the expected return on Static Corporation should increase by A. 4.5% B.7.0% C. 5.0% D. 0.5%

Answer 1

Beta is a measure of non-diversifiablerisk (Systematic Risk). It measures the sensitivity of the stock with reference to market index. Beta of 1.50 means the stock is 50% riskier than the market. Beta of .90 indicate that the stock is 10%(100-90) less risky than the index. If the stock market changes by 1%,a stock of beta .90 should change by 1*.90 = .90%. Similarly, if the stock market changes by 5%,a stock of beta .90 should change by 5*.90 = 4.5%. Since the beta is positive, direction of change will be same. That is if the market goes up, then stock will also goes up.

Hence the expected return on Static Corporation should increase by 4.5%.