Suppose Binder Corporation's common stock has an actual return of 12.34 percent compared to its expected return of 12.6 percent.The risk-free rate was expected to be 4.3 percent,which it was.The beta of F_i is .9 and the beta of F_GNP is 1.1.If inflation unexpectedly increased by 1.4 percent,what was the unexpected change in GNP? A)2.02 percent B)1.38 percent C)−.82 percent D)−1.38 percent E)−2.02 percent

Question

Quizplus · Accepted Answer

Using the capital asset pricing model (CAPM), we can find the expected return for Binder Corporation's common stock:
Expected Return = Risk-Free Rate + Beta*(Market Risk Premium)
where the market risk premium is the expected return of the market minus the risk-free rate.
Assuming the market is in equilibrium and efficient, we can use the actual return to find the unexpected change in GNP:
Actual Return = Risk-Free Rate + Beta*(Actual Change in GNP Risk Premium) + Unexpected Change in GNP Risk Premium
Solving for the unexpected change in GNP:
Unexpected Change in GNP Risk Premium = Actual Return - Risk-Free Rate - Beta*(Actual Change in GNP Risk Premium)
Plugging in the given numbers:
12.34% = 4.3% + 0.9*(Expected Market Risk Premium) + Unexpected Change in GNP Risk Premium
12.6% = 4.3% + 0.9*(Expected Market Risk Premium)
Solving for the expected market risk premium:
Expected Market Risk Premium = (12.6% - 4.3%)/0.9 = 9.333%
Plugging in the expected market risk premium and solving for the unexpected change in GNP risk premium:
Unexpected Change in GNP Risk Premium = 12.34% - 4.3% - 0.9*(9.333%) = -1.3764%
Therefore, the unexpected change in GNP is -1.38% (rounded to two decimal places).

Suppose Binder Corporation's Common Stock Has an Actual Return of 12.34