Question

A researcher has determined that a two-factor model is appropriate to determine the return on stock. The factors are the percentage change in GNP and in interest rate. GNP is expected to grow by 3.5 percent and the interest rate is expected to be 2.9 percent. A stock has a beta of 1.3 on the percentage change in GNP and a beta of -.47 on the interest rate. If the expected rate of return on the stock is 10.2 percent, what is the revised expected return on the stock if GNP grows by 3.2 percent and the interest rate is 2.7 percent?

Answer 1

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| 0 = a = 3 3 4 5 W ? v L 1 ENG 02:12 14-02-2020 26 E20 fi C A B D E F G H I J K L M N O EXPECTED CHANGE IN GNP EXPECTED CHANGE IN INTEREST RATE 3.50% 2.90% beta 1.30 B1 -0.47 B2 ACTUAL CHANGE IN GNP ACTUAL CHANGE IN INTEREST RATE 3.20% 2.70% REVISED EXPECTED RATE OF RETURN = EXPECTED RATE + B1*(ACTUAL CHANGE IN GNP-EXPECTED CHANGE IN GNP)+ B2*(ACTUAL CHANGE IN INTEREST RATE-EXPECTED CHANGE IN INTEREST RATE) REVISED EXPECTED RATE OF RETURN = 14 ANSWER REVISED EXPECTED RATE OF RETURN = 10.2% + 1.30(3.2%-3.5%) + (-0.47)*(2.7%-2.9%) 9.90% FARSI ... Sheet5 FV EXCEL PV EXCEL Sheet1 Sheet2 ASSETL extra Sheet6 Sheet7 gnp ©