Suppose That We Have Identified Three Important Systematic Risk Factors

question 1

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 they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.Assume expected return on the stock is 6%.

• A) -4.05%
• B) -2.05%
• C) 4.55%
• D) 0.40%
• E) 1.85%