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Answer: 6.4%
The expected return for Stock A is calculated using the factor betas and the changes in the macroeconomic factors from the baseline scenario. The baseline scenario has an industrial production growth of 3.0% and an interest rate of 1.5%, with an expected return for Stock A of 5.0%. The forecast for the following year predicts an industrial production growth of 4.2% (a 1.2% increase from the baseline) and an interest rate of 1.75% (a 0.25% increase from the baseline). The formula to calculate the expected return for the new scenario is: \[ \text{Expected Return} = \text{Baseline Return} + (\beta_{\text{industrial production}} \times \text{Industrial Production Shock}) + (\beta_{\text{interest rate}} \times \text{Interest Rate Shock}) \] Plugging in the values: \[ \text{Expected Return} = 5\% + (1.3 \times 1.2\%) + (-0.75 \times 0.25\%) \] \[ \text{Expected Return} = 5\% + 1.56\% - 0.1875\% \] \[ \text{Expected Return} = 6.3725\% \] Rounded to two decimal places, the expected return for Stock A for the next year is approximately 6.37%, which corresponds to option B (6.4%).
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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:
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?
A
4.8%
B
6.4%
C
6.8%
D
7.8%
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