NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index

The stock of a company in an index has a beta of 1.4 relative to the market. If the market index rises 5%, what is the expected change in the stock price according to beta, other factors being unchanged?

The stock is expected to rise 7%. Beta measures sensitivity to market movements, so the expected stock change equals beta of 1.4 multiplied by the market's 5% rise, giving 7%, assuming other factors are unchanged.

A3.57% increase
B5.0% increase
C7.0% increaseCorrect
D1.4% increase

Explanation

Expected change = beta x market change = 1.4 x 5% = 7%. Dividing 5 by 1.4 gives 3.57%, which inverts the relationship. A 5% move would imply beta of 1, and 1.4% ignores the market move.

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