You Have a Two-Factor Model to Forecast the Return for Security

question 46

Multiple Choice

You have a two-factor model to forecast the return for Security A: 4% + l.5(GDP) - 2(CPI) . You forecast GDP at 4% and CPI at 3% with variances of 6% and 5% respectively. The covariance (GDP, CPI) is .8 and the variance of the random error is 9%. The variance for Security A would be

• A) 47.3.
• B) 37.7.
• C) 52.4.
• D) 38.3.

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Definitions:

Financial Break-even

The point at which total revenue equals total costs and expenses, leaving the company with no net profit or loss.

Variable Cost

Costs that move in correspondence with the quantity of products made or services sold.

Fixed Costs

Expenses that do not vary with production volume or business activity level, such as rent, salaries, and insurance premiums.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the extent to which a firm uses fixed versus variable costs.