Suppose that we have identiﬁed three important systematic risk factors given by exports, inﬂation, and industrial production.In the beginning of the year, growth in these three factors is estimated at
-1%, 2.5%, and 3.5% respectively.However, actual growth in these factors turn out to be 1%, -2%, and
2%)The factor betas are given by bEX = 1.8, bI = 0.7, and bIP = 1.0.If the expected return on the
Equity is 6%, and no unexpected news concerning the equity surfaces, calculate the equity's total
Return.
A)2.95%
B)4.95%
C)6.55%
D)7.40%
E)8.85%

Question

Quizplus · Accepted Answer

To calculate the equity's total return, we need to use the following formula:
Total Return = Expected Return + Beta1*(Actual Return1 - Expected Return) + Beta2*(Actual Return2 - Expected Return) + Beta3*(Actual Return3 - Expected Return)
Plugging in the given values, we get:
Total Return = 6% + 1.8*(1% - (-1%)) + 0.7*(-2% - 2.5%) + 1.0*(2% - 3.5%)
Total Return = 4.95%
Therefore, the equity's total return is 4.95%. The answer is option B.

Suppose That We Have Identiﬁed Three Important Systematic Risk Factors