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Answer: 14.5%
This is a multifactor model where the revised return, $R_i$, will be given by: $$ R_i = E(R_i) + \beta_{S,GDP} F_{GDP} + \beta_{S,CS} F_{CS} + e_i $$ $$ = 0.10 + 2(0.04 - 0.03) + 2.5(0.03 - 0.02) $$ $$ = 0.10 + 0.02 + 0.025 $$ $$ = 0.145 \text{ or } 14.5\% $$ The calculation shows: - Base expected return: 10% - GDP factor contribution: 2 × (4% - 3%) = 2 × 1% = 2% - Consumer sentiment factor contribution: 2.5 × (3% - 2%) = 2.5 × 1% = 2.5% - Total revised return: 10% + 2% + 2.5% = 14.5%
Author: Tanishq Prabhu
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ShipLink, a United States cargo company, considers the return earned on its stock as heavily sensitive to GDP and consumer sentiments. You have been given the following data:
Suppose revised macroeconomic data suggests the GDP will grow by 4% rather than 3% and that consumer sentiments will grow by 3% rather than 2%. Determine the revised return for Shiplink stock, assuming no new information is available regarding the firm-specific return.
A
18%
B
25%
C
14.5%
D
4.5%