Question

assume the beta for the stock market in general is 1.0 and that the beta for world-wide television productions is 1.5. if the stock market increases by 20 percent, how much will the stock for world-wide productions increase?

Answer 1

Using the Capital Asset Pricing Model (CAPM), we can determine the expected return on an investment based on its level of risk, as measured by beta.

The formula for CAPM is:

Expected Return = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)

Assuming the risk-free rate is 2%, the expected return for the stock market would be:

Expected Return = 2% + 1.0 x (20% - 2%) = 18%

The expected return for Worldwide Television Productions would be:

Expected Return = 2% + 1.5 x (20% - 2%) = 25%

Therefore, if the stock market increases by 20%, the expected increase in the stock for Worldwide Television Productions would be 1.5 times the market return, or:

Expected Increase = 1.5 x 20% = 30%

Therefore, the stock for Worldwide Television Productions is expected to increase by 30% if the stock market increases by 20%.