Question

DUK stock has a Beta coefficient of 1.0. This means that if the Indianapolis-based market (index) LOSES 2.0% today (Monday, April 6, at 9:00 EDT), what will happen to DUK stock?

it will go down 1.0%

it will go down 2.0%

it will go down 100%

it will go down 200%

Question 361 pts

WISC stock has an Alpha of 1.5. If the index goes up, which of the following statements is most accurate?

WISC will go up 1.5%

WISC will go up 1.5 times more than the index

WISC will outperform the index by 1.5%

WISC will go down 1.5 times more than the index

Answer 1

DUK Stock

According to capital asset pricing model

Expected return of a stock = Risk free rate + Beta(Market return - Risk free rate)

For Beta = 1 . Expected return of a stock = Risk free rate + 1(Market return - Risk free rate)

                    Expected return of stock = Risk free rate + Market return - Risk free rate

                    Expected return of stock = Market return

Since returns of stock and market are equal for beta = 1, therefore if market losses 2% then stock of DUK will also loose 2%

Hence Answer: it will go down 2%

WISC Stock

Alpha of a stock gives us return of a stock in excess of benchmark of stock. Markets are considered to be efficient and investors are assumed earn returns equal to market by systematic investing. If a investor by his skill is able to generate excess return over market or benchmark, then he has generated alpha

Alpha = Return of stock - Return of benchmark or market

Despite of movement of stock, Return of stock will exceed return of maket by alpha.

If Alpha is 1.5 and market goes up, then WISC will outperform market by 1.5%

Answer: WISC will outperform the index by 1.5%