You Are Planning to Buy a Stock, the Risk on Which

question 78

Multiple Choice

You are planning to buy a stock, the risk on which is dependent on two factors: (1) the change in the inflation rate over the last year and (2) the spread between ten-year Treasury bonds and three-month Treasury bills.Suppose the average risk-free interest rate is 3 percent.The beta coefficients of the stock associated with the change in inflation rate and the spread between ten-year Treasury bonds and three-month Treasury bills are -2 and 4 respectively.If you expect the inflation rate to rise 6 percentage point and you think the spread will be 8 percentage points.What is the expected return to this stock? Use the arbitrage-pricing theory.

• A)11 percent
• B)12 percent
• C)18 percent
• D)23 percent

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Definitions:

Hypothalamus

A region of the brain that regulates numerous bodily functions, including temperature, thirst, hunger, sleep, mood, and the release of hormones.

Membrane Potential

The voltage difference across a cell's plasma membrane, due to the distribution of ions, important for conduction of impulses in neurons.

Voltage-Gated

Relating to ion channels that open or close in response to changes in membrane potential.

Sodium Channels

Protein channels in cell membranes that allow the passage of sodium ions into and out of the cell, critical for generating and transmitting electrical signals.