Explanation:
Using a single factor model, the revised expected return reflects the original expected return adjusted for the unexpected change in the macroeconomic factor.
Formula: Revised Return = Expected Return + Beta × (Unexpected change in factor)
Given:
Calculation: Revised Return = 7% + 0.8 × (-2%) Revised Return = 7% - 1.6% = 5.4%
The revised expected return is closest to 5.4%. Therefore, Option D is correct.
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Q.89 The common stock of General Electric is examined with a single factor model using unexpected percentage 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 2% as opposed to the original prediction of 4%. Assuming there’s no new information regarding firm-specific events, the revised expected return using a single factor model is closest to:
A
5.9%
B
6.2%
C
8.6%
D
5.4%