Question

Suppose two factors are identified for the US economy: the growth rate of industrial production, IP, and the inflation rate IR IP is expected to be 5% and IR 7%. A stock with a beta of 1 on IP and 0.6 on IR currently is expected o provide a rate of return o 14 t industrial production actually grows by 6%, while the ma on rate tums out to e 99 what s your est ess or e ate ofret m on he stock? (Round your answer to 1 decimal place.) Rate of return

Answer 1

1.
=14%+1*(6%-5%)+0.6*(9%-7%)=16.20%

2.
40%=6%+1.6*P1+2.5*P2
10%=6%+2.4*P1-0.7*P2
=>P2=47%/4.45=10.5618%
and P1=(40%-6%-2.5*10.5618%)/1.6=4.7472%

So, E(r)=6%+10.5618%*Bp1+4.7472%*Bp2