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Financial Risk Manager Part 1

Financial Risk Manager Part 1

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An analyst is evaluating how Stock A's returns respond to certain macroeconomic variables. The factor betas (sensitivities) for Stock A have been determined as follows:

  • β (industrial production) = 1.30
  • β (interest rate) = -0.75

Currently, under a baseline scenario where industrial production increases by 3.0% and the interest rate is 1.5%, the expected return for Stock A is 5.0%. The economic research division has forecasted an increase in economic activity for the next year, predicting that industrial production will grow by 4.2% and interest rates will increase by 25 basis points, reaching 1.75%. Based on these projections, what is the anticipated return for Stock A for the next year?

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