Suppose That We Have Identified Three Important Systematic Risk Factors

question 15

Multiple Choice

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production. In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively. However,actual growth in these factors turns out to be 1%,-2%,and 2%. The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.

• A) 7.95%
• B) 9.95%
• C) 11.55%
• D) 7.90%
• E) 9.35%

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Definitions:

Brand Extension

A strategy whereby a company uses an existing brand name to launch a product in a different category, leveraging the brand's established image and following.

Pure Competition

A market structure characterized by a large number of small firms, homogeneity of products, and easy entry and exit, leading to perfect competition.

Commodity Products

Products that are largely interchangeable with others of the same type because they have no significant differentiation.

Market Price

The current price at which an asset or service can be bought or sold in the marketplace, determined by supply and demand dynamics.