Suppose two factors are identified for the U.S. economy: the growth rate of indu

Question

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 6% and IR 6%. A stock with a beta of 1 on IP and 0.6 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 7%, while the inflation rate turns out to be 9%, what will be your expected rate of return on the stock, given the new information about the industrial production rate and the inflation rate? (Enter your answer as a percentage rounded to 1 decimal places.)

Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 6% and IR 6%. A stock with a beta of 1 on IP and 0.6 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 7%, while the inflation rate turns out to be 9%, what will be your expected rate of return on the stock, given the new information about the industrial production rate and the inflation rate? (Enter your answer as a percentage rounded to 1 decimal places.)

Explanation / Answer

Answer:

The revised estimates of expected return is equal to the original expected return plus changes in the dependent factor multi

Revised Expected rate of return on the stock

= Original expected return + Beta * Change in growth rate of industrial production + Beta * Change in inflation rate

= 12% + 1 * (7-6)% + 0.6 (9-6)% = 14.8% (ans)

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