A researcher has determined that a two-factor model is appropriate to determine

Question

A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 5.6 percent, and the interest rate is expected to be 5.1 percent. A stock has a beta of 3.3 on the percentage change in GNP and a beta of –.79 on the interest rate. If the expected rate of return on the stock is 14 percent, what is the revised expected return on the stock if GNP actually grows by 5.2 percent and the interest rate is 5.4 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Revised expected return    %

Explanation / Answer

expected rate of return = GNP Beta*change in GNP+interest Beta*change in interest+error

14=3.3*5.6-0.79*5.1+error

Error = -0.451

revised rate of return = GNP Beta*change in GNP+interest Beta*change in interest+error

= 3.3*5.2-0.79*5.4-0.451 = 12.44%

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