Question

Outdoor Products stock has an expected return of 12.6 percent and betas of: β_GNP = 1.52; β_I = 1.06; and β_Ex = 1.28. This expectation is based on a three-factor model with expected values of: GNP growth of 3.2 percent; inflation of 2.9 percent; and export growth of 2.2 percent. However, actual growth in these factors turns out to be 3.6 percent, 3.2 percent, and 2.5 percent, respectively. 

Calculate the stock's total return if the company unexpectedly announces they had an industrial accident and the operating facilities will close down temporarily which will reduce the return by 7 percent (from 10 percent down to 3 percent).

Answer 1

12.6% = riskfree + 1.52*3.2% + 1.06*2.9% + 1.28*2.2%

=> riskfree = 1.846%

=> Total return = 1.846% + 1.52*(3.6%) + 1.06*3.2% + 1.28*2.5% - 7% = 6.91%