Question

Company                         Beta

Savoy Corp                   0.76

Hokie Industries            1.28

Graham Records           2.27

Expo Exterprises           0.54

S&P 500                       1.00

1. If the S&P 500 goes up by 21.86 percent, how much should the stocks of Savoy, Hokie, Graham and Export change in value?
2. If the stock market drops by 10.06 percent, which one of these stocks should outperform the others? why ?

Answer 1

A . If the S&P 500 goes up by 21.86 percent. , Then respective changes in stocks will be-

Change in value= (Index change× beta of stock)

1. Savoy corp = ( 21.86× .76)= 16.61%

2. Hokie industries= (21.86×1.28) = 27.98%

3.Graham Records= (21.86× 2.27)= 49.62%

4. Expo enterprise= (21.86*.54) = 11.80%

So change in value will be following as reflected above in different stocks.

B. If the stock index falls by 10.06% , the stock which will outperform the other is the one which have the lowest beta i.e Expo Industries .

The lowest beta stock tends to outperform on the downside as they fall lowest in comparison to other stock in index. So Expo industries have the lowest beta here and the answer will be Expo industries.