Question

146. Stock JJJ was estimated to have a beta of 1. Its current price is 132. I, the index against which beta was estimated, is currently 2,880. What may you infer?
     1. If the period over which JJJ’s beta was estimated is a good guide, then if I increases to 2,908.8 over, say the next month, you may expect JJJ to increase to 133.32

Please explain this answer

Answer 1

Answer:- Beta is measure of systematic risk. It is measure which tells us to what extent the stock is volatile in relation to the overall market. If the volatility of stock is more than the market then it will have high beta and if the volatility of stock is less than the overall market then it will have less beta. But if the stock volatility is same as that of the market, then it will have beta equals to 1. It means that the percentage by will the market will go up or down, with the same percentage the stock will also go up and down.  

In the given case, Stock JJJ is estimated to have beta of 1. Stock JJJ has current price of 132 and the index against which beta was estimated that is I, is currently 2,880. So, if the market rises by 1% then stock JJJ will rise by 1% that is

If index becomes 2880 + (1% of 2880) = 2908.8, then Stock JJJ will be 132 + (1% of 132) = 133.32.

More examples will be:

• If the market rises by 10% then stock JJJ will also rise by 10% that is

If index becomes 2880 + (10% of 2880) = 3168, then Stock JJJ will be 132 + (10% of 132) = 145.20

• If the market goes down by 1% then stock JJJ will also go down by 10% that is

If index becomes 2880 - (1% of 2880) = 2851.2 , then Stock JJJ will be 132 - (1% of 132) = 130.68

• If the market goes down by 10% then stock JJJ will also go down by 10% that is

If index becomes 2880 - (10% of 2880) = 2592, then Stock JJJ will be 132 - (10% of 132) = 118.8