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 turns out to be 1%,-2%,and 2%. The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. Calculate the stock'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

The stock's total return is calculated by considering the unexpected changes in the factors and their respective betas, plus the additional return from the patent filing. The unexpected changes are: Exports (1% - (-1%)) = 2%, Inflation (-2% - 2.5%) = -4.5%, Industrial Production (2% - 3.5%) = -1.5%. The total return is: (1.8 * 2%) + (0.7 * -4.5%) + (1.0 * -1.5%) + 5% = 9.95%.

Suppose That We Have Identified Three Important Systematic Risk Factors