Question
In: Finance
A researcher has determined that a two-factor model is appropriate to determine the return on a stock.
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 5.2 percent and the interest rate is expected to be 4.7 percent. A stock has a beta of 2.9 on the percentage change in GNP and a beta of -75 on the interest rate.
If the expected rate of return on the stock is 10 percent, what is the revised expected return on the stock if GNP actually grows by 4.8 percent and the interest rate is 5.0 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Solutions
jeff jeffy answered 2 years agoRelated Solutions
A researcher has determined that a two-factor model is appropriate to determine the return on a...
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 4.1 percent, and the interest rate is expected to be 3.6
percent. A stock has a beta of 1.8 on the percentage change in GNP
and a beta of –.8 on the interest rate. If the expected rate of
return on the stock is 14...
Factor Models Suppose a factor model is appropriate to describe the returns on a stock. The...
Factor Models Suppose a factor model is appropriate to describe
the returns on a stock. The current expected return on the stock is
10.5 percent. Information about those factors is presented in the
following:
Factor
B
Expected Value
Actual Value
Growth in GNP
1.67
2.1%
2.6%
Inflation
-1.09
4.3
4.8
a. What is the systematic risk of the stock return?
b. The firm announced that its market share had unexpectedly
increased from 11 percent to 15 percent. Investors know from...
Suppose that a two-factor model, where the factors are the market return (Factor 1) and the...
Suppose that a two-factor model, where the factors are the
market return (Factor 1) and the growth rate of industrial
production (Factor 2), correctly describes the return generating
processes of all assets and the corresponding two-factor APT
correctly prices three well-diversified portfolios, A, B, and
C.
Portfolio
Expected Return
Sensitivity to Factor 1
Sensitivity to Factor 2
A
15%
1
0
B
20%
1
1
C
5%
0
0
What are i) the risk premiums of the two factors and...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0008021
$14,161
$14,142
Inflation
−.85
3.4%
3.2%
Interest rates
−.42
6.2%
6.0%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0007421
$14,086
$14,062
Inflation
−.95
2.9%
2.7%
Interest rates
−.37
5.2%
5.0%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded...
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those...
Suppose a three-factor model is appropriate to describe the
returns of a stock. Information about those three factors is
presented in the following chart:
Factor
β
Expected Value
Actual Value
GDP
.0007781
$14,131
$14,110
Inflation
−.98
3.2%
3.0%
Interest rates
−.40
5.8%
5.6%
a.
What is the systematic risk of the stock return? (A
negative answer should be indicated by a negative sign. Do not
round intermediate calculations and enter your answer as a percent
rounded to 2...
You model the stock returns using the Fama-French 3-factor model. The expected return for the market...
You model the stock returns using the Fama-French 3-factor
model.
The expected return for the market is 14%, the risk-free rate is
2%, the expected return on the Small-Minus-Big (SMB) portfolio is
2%, and the expected return on the High-Minus-Low (HML) portfolio
is 1.8%.
Canopy Growth Corporation (CGC) as a beta with respect to the
market of 0.9, a beta with respect the SMB portfolio of -0.14, and
a beta with respect to the HML portfolio of 0.1.
According the...
You model the stock returns using the Fama-French 3-factor model. The expected return for the market...
You model the stock returns using the Fama-French 3-factor
model.
The expected return for the market is 14%, the risk-free rate is
2%, the expected return on the Small-Minus-Big (SMB) portfolio is
1%, and the expected return on the High-Minus-Low (HML) portfolio
is 1.3%.
Canopy Growth Corporation (CGC) as a beta with respect to the
market of 0.9, a beta with respect the SMB portfolio of -0.12, and
a beta with respect to the HML portfolio of 0.11.
According the...
Assume that you are using a two-factor APT model to find the expected return on a...
Assume that you are using a two-factor APT model to find the
expected return on a well-diversified portfolio Q that promises an
expected return of 18%. The relevant factor portfolios, their
betas, and their factor risk premiums are shown in the table below.
The assumed risk-free rate is 3.5%.
Factor
Factor Beta
Factor risk premium
A
1.4
12.0%
B
0.8
-3.5%
What is the arbitrage strategy?
You are considering two stocks and have determined the following information: Stock A Return Probability of...
You are considering two stocks and have determined the following
information: Stock A Return Probability of the Return 21 % 50 % 12
10 5 40 Stock B Return Probability of the Return 32 % 10 % 15 60 8
30 Which of the two stocks has the higher expected return? Round
your answers to two decimal places. The return on Stock A: % The
return on Stock B: % has the higher expected return. Which stock is
riskier? Do...
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