Suppose a three-factor model is appropriate to describe the returns of a stock.

Question

Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart:

a. What is the systematic risk of the stock return? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

what is Systematic risk of the stock return ____%

b. Suppose unexpected bad news about the firm was announced that causes the stock price to drop by 1.3 percent. If the expected return on the stock is 13.9 percent, what is the total return on this stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Total return of the stock ______%

Factor Expected Value Actual Value   GDP .0008621 $14,236     $14,222        Inflation .90 3.9% 3.7%   Interest rates .47 7.2% 7.0%

Explanation / Answer

ANS A) Systematic risk = Systematic risk, also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. Also referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price.

systematic risk of the stock return = .0008621 - 0.90 - 0.47 = -1.37

Ans B)

expected return = 13.9%

unexpected fall = 1.3%

total return = 13.9% *(100%-1.3%)

                  = 100*13.9% *98.7%                       assuming 100 is the price of the stock

                  =112.41

Total return = 12.41%

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