504 INTERNATIONAL PORTFOLIO INVESTMENT AND ASSET PRICIN a. All else constant, is

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504 INTERNATIONAL PORTFOLIO INVESTMENT AND ASSET PRICIN a. All else constant, is BP's in world industrial production? With an incre an increase in the pound? share price likely to go up or down with an increase ase in crude oil prices? With b. What is the expected return on BP stock in a year when the production factor is 2 percent, the oil price factor is 10 percent rate factor is 5 percent? world indus , and the s trial c. If BP stock rises by 4 percent during this period, by how much does BP over or underperform its expectation? 20.4 As a security analyst covering the French market, you've identified the follow ing factors and factor sensitivities for Elf Acquitaine ("Elf") Elf's functional currency is the euro. Factors and factor sensitivities in euros are as follows: Factors Sensitivities Fprod unexpected change in world industrial production Pprod +1.10 Fo unexpected change in crude oil prices F Term unexpected change in the term premium (the slope of Term -0.05 the yield curve measured as long vs. short Treasuries) unexpected change in investor risk preferences (the difference between corporate and Treasury 10-year bond yields) PRisk -0.10 FRisk spot unexpected change in the euro value of a basket of S0.02 foreign currencies (se/f) with which Elf trades 12 percent if all factors are equal to zero a. State whether Elf's shares are likely to go up or down with an increase in b. Given these parameters, what is the expected return on Elf stock in a year c. If Elf stock falls by 12 percent during this period, by how much does Elf over Elf's expected return is ? world industrial production, crude oil prices, the slope of the term structure, the risk premium, or the euro when each factor is 10 percent higher than its expectation? or underperform its expectation given each of the factors wa 20.5 As a security analyst for the New York branch of Deutsche Bank, you ities for Amazon.com: higher than its expectation during the period? iu

Explanation / Answer

A) elf share is likely to go up with the increase in world industrial production and crode oil price as beta for these two factor is positive while it will go down with increase in slope of term structure, risk premium and euro as their beta is negative

Suppose there is 1%increase in all the factors the expected return will go up as positive impact of beta of industrial production and crude oil is higher than negative impact of other factors

B) expwcted return=0.12+1.1*.10+0.60*0.10+(-0.05)*0.10+(-0.10*0.10)+(-0.02*0.10)

=0.12+0.11+0.06-0.005-0.01-0.002=0.273=27.3%

C)at 10% higher the expectation was 27.3%, the stock has under perform=27.3%-(-12%)=39.3%

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