Suppose that two factors have been identified for the U.S. economy: the growth r

Question

Suppose that two factors have been identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 2%, and IR 5.0%. A stock with a beta of 0.8 on IP and 0.4 on IR currently is expected to provide a rate of return of 11%. If industrial production actually grows by 5%, while the inflation rate turns out to be 6.0%, what is your revised estimate of the expected rate of return on the stock? (Do not round intermediate calculations. Round your answer to I decimal place. Omit the % sign n your response.) Revised expected rate of return %

Explanation / Answer

The return of stock of 11 % is dependent variable.

Its amultuple regression equation of 2 variables

11 % = 0.8×2% + 0.4×5% + error

11% =1.6% + 2% + error

11% = 3.6% + error, so error is 7.4%.

Now we have,

5% × 0.8 + 6% ×0.4 + 7.6% = 14% is return on stock.

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