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.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 expected return based on the estimated growth rates: E(R) = b_EX * ΔEX + b_I * ΔIN + b_IP * ΔIP = 1.8*(-1%) + 0.7*(2.5%) + 1*(3.5%) = 3.35% Next, we need to calculate the actual return based on the actual growth rates: R = b_EX * ΔEX + b_I * ΔIN + b_IP * ΔIP = 1.8*(1%) + 0.7*(-2%) + 1*(2%) = 0.6% Finally, we need to adjust for the company's announcement of the industrial accident: R_adj = R - 0.07 = -0.07% Therefore, the equity's total return is -0.07%, which is closest to option B: -2.05%.

Suppose That We Have Identified Three Important Systematic Risk Factors