Suppose That We Have Identified Three Important Systematic Risk Factors

question 14

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 turn out to be 1%,-2%,and 2%.The factor betas are given by b_EX = 1.8,b_I = 0.7,and b_IP = 1.0.What would the equity's total return be if the actual growth in each of the facts was equal to growth expected? Assume no unexpected news on the patent.

• A)4%
• B)5%
• C)6%
• D)7%
• E)8%

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