Answer: 6.4%

The expected return for Stock A can be calculated using the single-factor and multifactor models of risk and return as follows: 1. **Baseline Expected Return**: The baseline expected return for Stock A is given as 5.0%. 2. **Factor Betas**: The factor betas for industrial production and interest rate are 1.30 and -0.75, respectively. 3. **Baseline Factors**: Under the baseline scenario, industrial production growth is 3.0%, and the interest rate is 1.5%. 4. **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%. 5. **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% 6. **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.

Author: LeetQuiz Editorial Team