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:

Factor	β	Expected Value	Actual Value
GDP	.0008741	$14,251	$14,238
Inflation	-.91	4.0%	3.8%
Interest rates	-.48	7.4%	7.2%

a.	What is the systematic risk of the stock return? (A negative answer should be indicated by a negative sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	Suppose unexpected bad news about the firm was announced that causes the stock price to drop by 1.4 percent. If the expected return on the stock is 14.0 percent, what is the total return on this stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a.	Systematic risk of the stock return	_____ %
b.	Total return of the stock	_____ %

Answer 1

a. Systematic risk is related to major situations likeinterest rates, recessions and wars. These cannot be diversified away. The systematic factors in the list are GDP, inflation and interest

rate

The systematic portion of the return is given by 0.0008741(14238-14251)-.91(3.8%-4.0%)-0.48(7.2%-7.4%)

= -.0113633 –(-.182%)-(-.096%)

= -.0085833

= -8.58%

b. Unexpected bad news about the firm causes the re-turns by 1.4 percentage

The unsystematic risk portion of the return is=-1.4%

Expected Return is 14 percent. Therefore total return is

= 14% + (-8.58%) + (-1.4%)

= 4.02%

Answer 2

This was done the right way, but there was a shifted decimal point with the -8.58%, as a percentage, it is actually -0.858%. Systematic risk is 0.858% and the total return is 11.74%. Thank you for posting this.