Section B

Question 1

PAYBACK PERIOD ASSUMPTION

Answer 1

TO calculate the exact period we
need to assume that the revenue
Is earned equally throughout the period

Question 2

Payback period rule

Answer 2

If payback is less than the maximum allocated time then invest.

If payback is greater than the maximum time allowed then don’t invest.

Question 3

Beta definition

Answer 3

Beta is a measure of volatility or risk for an individual stock.

Question 4

What does Beta tell you

Answer 4

It tells you how correlated the stick is with the market average and gives you a better idea of how volatile the stock would be when compared to the market. (Market Average)

Question 5

What does a stick with higher beta indicate

Answer 5

It indicates that the stock is more volatile than the market.

Question 6

What does a stock with lower beta indicate

Answer 6

Indicates the stock is less volatile than the market.

Question 7

How do you find beta

Answer 7

To find beta each stock will be compared to a market index to understand if it moves in tandem with that index or not. The market index used is the S&P 500.

Question 8

What does a beta of 1 indicate?

Answer 8

A beta of 1 indicates a perfect correlation with the stock market which means that whatever the index does over a given period of time the stock should have the exact same movements as the index.

Question 9

What does a beta stock of more than 1 (>1) indicate?

Answer 9

It indicates that the stock is more sensitive than the index. So if the stock has a beta of 1.5 for instance that means for every 1% change in market average the stock itself will move by 1.5%.

Question 10

What does a beta stock of less than 1 (<1) indicate?

Answer 10

It indicates that the stock is less sensitive then the index. So if the stock has a beta of 0.7 then for every 1% move in the market the stock will only change by 0.7%

Question 11

What happens if a market declines by 1%

Answer 11

For a more sensitive stock for instance a stock with a beta of 1.5% when the market loses 1% the stock will decline by 1.5%.

Question 12

What does a Beta Asset of 0 indicate?

Answer 12

It indicates that there is no correlation between the asset and the stock market.

Question 13

What is regarded as an asset with a beta of zero

Answer 13

Cash

Question 14

What does a Negative beta asset mean

Answer 14

It means that the asset has an inverse relationship with the stock market.

Question 15

What does a negative beta asset indicate?

Answer 15

It indicates that when the stock market is up the negative beta asset is down.