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 b_EX = 1.8,b_I = 0.7,and b_IP = 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%

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Quizplus · Accepted Answer

The total return is calculated by adjusting the expected return with the impact of unexpected changes in the factors. The unexpected changes are: Exports: 1% - (-1%) = 2%, Inflation: -2% - 2.5% = -4.5%, Industrial Production: 2% - 3.5% = -1.5%. The impact on return is calculated as: (1.8 * 2%) + (0.7 * -4.5%) + (1.0 * -1.5%) = 3.6% - 3.15% - 1.5% = -1.05%. Therefore, the total return is 6% - 1.05% = 4.95%.

Suppose That We Have Identified Three Important Systematic Risk Factors