Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?
A) 15.9%
B) 12.9%
C) 13.2%
D) 12%

Question

Quizplus · Accepted Answer

E[r_new] = 12% + 1.2(5% - 3%) + .5(-2% - 1%) = 12.9%

Research Has Identified Two Systematic Factors That Affect U