Financial Risk Manager Part 1
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A financial analyst develops a Capital Pricing Model that regresses the expected monthly return of a company on the prevailing interest rates. The coefficients are β₀ = 0.064 and β = 0.65 where β₀ is the intercept. What is the value of the monthly expected return for the company if the interest rate at a particular month is 5%?
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TTanishq
A
0.0965
B
0.0856
C
0.0778
D
0.0567
Explanation:
Explanation
Using the stated regression parameters, the regression equation is:
Expected Monthly Return = β₀ + β(Interest rates)
Where:
- β₀ = 0.064 (intercept)
- β = 0.65 (slope coefficient)
- Interest rate = 5% = 0.05
So, when the interest rate is 5%, the corresponding expected return is:
Expected Monthly Return = 0.064 + 0.05 × 0.65
= 0.064 + 0.0325
= 0.0965 = 9.65%
Therefore, the correct answer is A. 0.0965.
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