Answer-first summary for fast verification
Answer: 6.4%
The expected return for Stock A is calculated by using the factor betas and the changes in the macroeconomic factors from the baseline scenario. The baseline expected return is given as 5.0%. The "shocks" or changes from the baseline are an increase in industrial production by 1.2% (4.2% - 3.0%) and an increase in the interest rate by 0.25% (1.75% - 1.5%). The formula to calculate the new expected return is: \[ \text{Expected Return for Stock A} = \text{Baseline Return} + (\beta_{\text{industrial production}} \times \text{Industrial Production Shock}) + (\beta_{\text{interest rate}} \times \text{Interest Rate Shock}) \] Plugging in the values: \[ \text{Expected Return for Stock A} = 5.0\% + (1.3 \times 1.2\%) + (-0.75 \times 0.25\%) \] \[ \text{Expected Return for Stock A} = 5.0\% + 1.56\% - 0.1875\% \] \[ \text{Expected Return for Stock A} = 6.37\% \] Thus, the expected return for Stock A for the following year, based on the economic forecast, is 6.37%. The correct answer is B. 6.4%.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
An analyst is evaluating how Stock A's returns are influenced by different macroeconomic factors. The sensitivity of Stock A's return to these factors is quantified by the following factor betas:
Currently, it is assumed that a 3.0% increase in industrial production and an interest rate of 1.5% lead to a projected return of 5.0% for Stock A. The economic research team forecasts a significant economic upturn for the next year, expecting a 4.2% increase in industrial production and a 25 basis point rise in interest rates, bringing them to 1.75%. Based on these predictions, what return for Stock A is projected for the upcoming year?
A
4.8%
B
6.4%
C
6.8%
D
7.8%
No comments yet.