Financial Risk Manager Part 1

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Explanation:

The expected return for Stock A can be calculated using the single-factor and multifactor models of risk and return as follows:

Baseline Expected Return: The baseline expected return for Stock A is given as 5.0%.
Factor Betas: The factor betas for industrial production and interest rate are 1.30 and -0.75, respectively.
Baseline Factors: Under the baseline scenario, industrial production growth is 3.0%, and the interest rate is 1.5%.
Forecasted Factors: The economic research department forecasts industrial production to grow by 4.2% and interest rates to increase by 25 basis points to 1.75%.
Factor Shocks: The "shocks" or changes in factors from the baseline scenario are:
- Industrial production shock: 4.2% - 3.0% = 1.2%
- Interest rate shock: 1.75% - 1.5% = 0.25%
Calculating New Expected Return: The formula to calculate the new expected return is:
$\text{New Expected Return} = \text{Baseline Expected Return} + (\text{Factor Beta} \times \text{Factor Shock})$
Plugging in the values:
$\text{New Expected Return} = 5\% + (1.3 \times 1.2\%) + (-0.75 \times 0.25\%) = 6.37\%$

The calculated expected return for Stock A for the next year, based on the forecasted changes in macroeconomic factors, is 6.37%. This corresponds to option B (6.4%), which is the closest to the calculated value. The slight discrepancy between the calculated value and the option provided could be due to rounding during the calculation process.

Explanation:

The expected return for Stock A can be calculated using the single-factor and multifactor models of risk and return as follows:

Baseline Expected Return: The baseline expected return for Stock A is given as 5.0%.
Factor Betas: The factor betas for industrial production and interest rate are 1.30 and -0.75, respectively.
Baseline Factors: Under the baseline scenario, industrial production growth is 3.0%, and the interest rate is 1.5%.
Forecasted Factors: The economic research department forecasts industrial production to grow by 4.2% and interest rates to increase by 25 basis points to 1.75%.
Factor Shocks: The "shocks" or changes in factors from the baseline scenario are:
- Industrial production shock: 4.2% - 3.0% = 1.2%
- Interest rate shock: 1.75% - 1.5% = 0.25%
Calculating New Expected Return: The formula to calculate the new expected return is:
$\text{New Expected Return} = \text{Baseline Expected Return} + (\text{Factor Beta} \times \text{Factor Shock})$
Plugging in the values:
$\text{New Expected Return} = 5\% + (1.3 \times 1.2\%) + (-0.75 \times 0.25\%) = 6.37\%$

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A financial analyst is examining the sensitivity of stock A's returns to various macroeconomic factors. The factor betas for stock A have been determined as follows: βindustrial production = 1.30, βinterest rate = -0.75

Currently, the analyst assumes a 3.0% increase in industrial production and an interest rate of 1.5%. Under these conditions, the expected return for stock A is 5.0%. The economic research team is forecasting an improvement in economic conditions for the upcoming year, predicting a 4.2% rise in industrial production and a 25 basis points increase in interest rates to 1.75%. Considering these new projections, what is the expected return for stock A in the next year?

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Last updated: July 15, 2026 at 14:11

4.8%

9.5%

6.4%

62.5%

6.8%

17.9%