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 they had an industrial
Accident and the operating facilities will closed down for some time thus resulting in a loss by the
Company of 7% in return.
A)-4.05%
B)-2.05%
C)4.55%
D)0.40%
E)1.85%

Question

Quizplus · Accepted Answer

First, we need to calculate the actual growth rates of the three factors by adding the initial growth rates to their deviations (actual growth rate - initial growth rate):
- Exports: -1% + (1% - (-1%)) = 1%
- Inflation: 2.5% - (2% - 2.5%) = 3%
- Industrial Production: 3.5% + (2% - 3.5%) = 2%
Next, we need to calculate the portfolio's expected return based on the actual growth rates:
E(Rp) = 0.6(1%) + 0.2(3%) + 0.2(2%) = 1.2%
Then, we need to calculate the portfolio's actual return based on the announced loss:
R = 6% - 0.7(1.2%) - 1.8(1%) - 1.0(2%) - 7% = -2.05%
Therefore, the equity's total return is -2.05%, which is option B.

Suppose That We Have Identiﬁed Three Important Systematic Risk Factors