Suppose That We Have Identified Three Important Systematic Risk Factors

question 25

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. If the expected return on the stock is 6%,and no unexpected news concerning the stock surfaces,calculate the stock's total return.

• A) 2.95%
• B) 4.95%
• C) 6.55%
• D) 7.40%
• E) 8.85%

---

Definitions:

Preferred Stock

A class of stock that provides shareholders with a fixed dividend before any dividends are issued to common stockholders, often with no voting rights.

Common Stock

A type of equity ownership in a corporation, representing a claim on part of the company's profits and assets.

Dividends in Arrears

Outstanding dividend payments that have not been paid to preferred shareholders.

Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock, often with dividend payment preferences.