Alpha stock has an expected return of 8.2 percent and betas of: β_GNP = 1.23; β_I = .97; and β_Ex = 1.08.This expectation is based on a three-factor model with expected values of: GNP growth of −1 percent; inflation of 2.4 percent; and export growth of 3.5 percent.However,actual growth in these factors turns out to be .55 percent,1.8 percent,and 2.6 percent,respectively.Assuming there was no unexpected news related specifically to the stock,what was the stock's total rate of return? A)8.04 percent B)8.55 percent C)8.47 percent D)7.85 percent E)8.85 percent

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Quizplus · Accepted Answer

The total rate of return can be calculated using the formula for the expected return plus the sum of the products of each beta and the difference between the actual and expected values of the factors. The expected return is 8.2 percent. The calculation for the additional return due to the differences in factor growth is as follows:- GNP growth: $1.23 \times (.55 - (-1)) = 1.23 \times 1.55 = 1.9065$- Inflation: $.97 \times (1.8 - 2.4) = .97 \times (-0.6) = -0.582$- Export growth: $1.08 \times (2.6 - 3.5) = 1.08 \times (-0.9) = -0.972$Adding these together: $1.9065 - 0.582 - 0.972 = 0.3525$Adding this to the expected return: $8.2 + 0.3525 = 8.5525\% $Rounded to two decimal places, the total rate of return is 8.55 percent.

Alpha Stock Has an Expected Return of 8