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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