If the expected rate of GNP growth was 3 percent and the actual rate was .2 percent higher than the expectation,the total return on a stock would change by ________ based on a multifactor model. A)3.2β_GNP B).2β_GNP C)−.2β_GNP D)−3.2β_GNP E)3β_GNP

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Quizplus · Accepted Answer

The change in GNP growth rate is 0.2% higher than expected, which means it is an increase of 0.2/100 = 0.002. The impact of this change on total return can be calculated using the multifactor model formula: ΔR = βS1U1B1ΔS1 + βS0U0B0ΔS0 + βS1U0B1ΔU1 + βS0U1B1ΔU0 + βS0U0B1ΔB1 + ε. Since the change in GNP growth rate is the only variable that has changed, all other variables would remain the same. Therefore, ΔS1 = 0, ΔS0 = 0, ΔU1 = 0, ΔU0 = 0, and ΔB1 = 0. Plugging in the values, we get ΔR = 0.2βS1U1B1GNPS1U1B0, which means the total return on the stock would change by 0.2βS1U1B1GNPS1U1B0.

If the Expected Rate of GNP Growth Was 3 Percent