Problem 12-1 Factor Models A researcher has determined that a two-factor model i
ID: 2750600 • Letter: P
Question
Problem 12-1 Factor Models
A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 5.0 percent, and the interest rate is expected to be 4.5 percent. A stock has a beta of 2.7 on the percentage change in GNP and a beta of –.73 on the interest rate.
If the expected rate of return on the stock is 13 percent, what is the revised expected return on the stock if GNP actually grows by 4.6 percent and the interest rate is 4.8 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 5.0 percent, and the interest rate is expected to be 4.5 percent. A stock has a beta of 2.7 on the percentage change in GNP and a beta of –.73 on the interest rate.
Explanation / Answer
expected return = residual + GNP*GNPfactor + interest rate*interest rate factor
13=residual+5*2.7+4.5*(-.73) =11.70%
residual = 2.785
Revised return = 2.785+4.6*2.7+4.8*(-.73) =