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: - Expected return for Shiplink stock = 10% - GDP factor beta = 2 - Expected growth in GDP = 3% - Consumer sentiment factor beta = 2.5 - Expected growth in consumer sentiment = 2% 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. | Financial Risk Manager Part 1 Quiz

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:

Expected return for Shiplink stock = 10%
GDP factor beta = 2
Expected growth in GDP = 3%
Consumer sentiment factor beta = 2.5
Expected growth in consumer sentiment = 2%

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.

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TTanishq

Explanation:

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%

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