Explanation:
The equation for a single factor model for stock i is given by:
Where:
revised return for stock i
the expected return for stock i
the jth factor beta for stock i
the deviation of the factor j from its expected value
the firm-specific return for stock i
In our case:
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Q.226 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:
Expected return for Swisscom = 10%
GDP factor-beta = 2
Expected GDP growth = 2%
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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