Question 76

Suppose an analyst uses a 2-factor model to analyze expected returns for the Silicon Valley Internet Company (SVIC). The analyst identifies GDP and 3-month U.S. Treasury bill rate as two factors for the factor model. Initial expected return for SVIC is 10%. The following data is available:

• GDP growth consensus forecast = 2%
• T-bill rate consensus forecast = 0.75%
• GDP factor beta for SVIC = +2.00
• T-bill rate factor beta for SVIC = −4.00

Suppose that GDP ends up growing by 5% and the 3-month U.S. Treasury bill rate ends up equaling 1.25%. Also suppose that during the period, SVIC unexpectedly experiences extreme success with one of their new products, leading to revenues that are higher than originally expected. Because of this, the firm-specific return is +1% during the period. Using a 2-factor model with the revised data, the expected return for SVIC is closest to: