Research Has Identified Two Systematic Factors That Affect US Stock

question 21

Multiple Choice

Research has identified two systematic factors that affect US stock (share) returns. The factors are growth in industrial production and changes in long term interest rates. Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%. You are analysing a share that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the share's return?

• A)15.9%
• B)12.9%
• C)13.2%
• D)12.0%

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Definitions:

Sales Growth

The increase in sales over a specific period, indicating the performance and scaling efforts of a business.

Present Value

The present worth of a future amount of money or series of cash flows, when calculated using a particular return rate.

Nominal Annual Rate

The interest rate stated on a loan or financial product, not adjusted for inflation or the compounding of interest within a year.

Effective Rate

The actual interest rate on a loan or financial product, taking into account the compounding of interest over time, contrasting with the nominal rate.