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Answer: 16%
## Explanation The equation for a single factor model for stock i is given by: $$ R_i = E(R_i) + \beta_{i,j} F_j + e_i $$ Where: - $ R_i $ = revised return for stock i - $ E(R_i) $ = the expected return for stock i - $ \beta_{i,j} $ = the jth factor beta for stock i - $ F_j $ = the deviation of the factor j from its expected value - $ e_i $ = the firm-specific return for stock i Given data: - $ E(R_i) = 10\% = 0.10 $ - $ \beta_{i,j} = 2 $ - Expected GDP growth = 2% = 0.02 - Actual GDP growth = 5% = 0.05 - $ F_j = 0.05 - 0.02 = 0.03 $ (unexpected GDP growth) - $ e_i = 0 $ (no new firm-specific information) Calculation: $$ R_i = 0.10 + 2(0.05 - 0.02) = 0.10 + 2(0.03) = 0.10 + 0.06 = 0.16 \text{ or } 16\% $$ Therefore, the revised expected return is 16%.
Author: Tanishq Prabhu
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The common stock of Swisscom Inc. is examined with a single factor model using unexpected percent changes in GDP as the single factor. You have been provided with the following data:
Revised macroeconomic information strongly suggests that the GDP will grow by a whopping 5% as opposed to the original prediction of 2%. Assuming there's no new information regarding firm-specific events, calculate the revised expected return using a single factor model.
A
10.6%
B
6%
C
20%
D
16%
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