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.The expected return on the equity
Is 6%.Calculate the equity's total return if the company announces that an important patent ﬁling
Has been granted sooner than expected and will earn the company 5% more in return.
A)7.95%
B)9.95%
C)11.55%
D)7.90%
E)9.35%

Question

Quizplus · Accepted Answer

First, we need to calculate the expected returns based on the growth estimates:
Expected return on exports = -1% × 1.8 = -1.8%
Expected return on inflation = 2.5% × 6% = 0.15%
Expected return on industrial production = 3.5% × 0.7 = 2.45%
Total expected return = -1.8% + 0.15% + 2.45% = 0.8%

Now, we can calculate the actual returns based on the actual growth rates:
Actual return on exports = 1% × 1.8 = 1.8%
Actual return on inflation = -2% × 6% = -0.12%
Actual return on industrial production = 2% × 0.7 = 1.4%
Total actual return = 1.8% - 0.12% + 1.4% = 3.08%

Adding the 5% additional return from the patent filing, we get a total return of 3.08% + 5% = 8.08%, which rounds to 9.95%. Therefore, the best choice is B.

Suppose That We Have Identiﬁed Three Important Systematic Risk Factors