Suppose Conroy Corp. in Example 9.2 is a defense contractor that makes sophisticated antimissile systems. Would the estimate of return done in that example be valid? What if Conroy were in the orange juice business?
Conroy Corp. has a beta of 1.8 and is currently earning its owners a return of 14%. The stock market in general is reacting negatively to a new crisis in the Middle East that threatens world oil supplies. Experts estimate that the return on an average stock will drop from 12% to 8% because of investor concerns over the economic impact of a potential oil shortage as well as the threat of war. Estimate the change in the return on Conroy shares and its new return.