Question

I hope the answer including the Formula , without using the Excel

b) Suppose a three factor model is appropriate to describe the returns of a stock. The current expected return of the stock is 11%. Information about those factors is presented in the following table: Factor Expected value Actual Value Inflation GNP Interest Rates -1.8 i. What is the systematic risk of the stock return? (6 marks) ii. The firm announced that its market share had unexpected increased from 22 percent to 28 percent. Investors know from past experience that the stock return will increase by 0.40 percent for every 1 percent increase in its market share. What is the unsystematic risk of the stock? (6 marks) iii. What is the total return on this stock? (6 marks)

Answer 1

i The systematic portion of the return =Beta Inflation*(actual value-Expected Value)+Beta GNP*(actual value-Expected Value)+Beta Interest rates*(actual value-Expected Value) =2*(7%-5%)+1*(1%-2%)-1.8*(-2%+4%) =-0.6%

ii. Increase in market share =28%-22% =6%
The increase in stock return =6%*0.40 =2.40%

iii.Total return on this stock =Expected Return +Systematic Risk +Unsystematic Risk =11%-0.6%+2.40% =12.80%