Suppose that two factors have been identified for the U. S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3%, and IR 5%. A stock with a beta of 1 on IP and. 5 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 5%, while the inflation rate turns out to be 8%, what is your revised estimate of the expected rate of return on the stock

Question

Business

Aniyah Kim

10 March, 21:41

Suppose that two factors have been identified for the U. S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3%, and IR 5%. A stock with a beta of 1 on IP and. 5 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 5%, while the inflation rate turns out to be 8%, what is your revised estimate of the expected rate of return on the stock

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Answers (1)

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Harmony · Answer 1

The correct answer is 15.5%.

Explanation:

According to the scenario, the computation of the given data are as follows:

IP = 3%

IR = 5%

Stock with beta on IP = 1

Stock with beta on IR = 0.5

RR = 12%

So,

12% = a + (3% * 1) + (5% * 0.5)

12% = a + 3% + 2.5%

a = 12% - 5.5% = 6.5%

So, revised expected rate of return can be calculated as follows:

RR = 6.5% + (5% * 1) + (8% * 0.5)

RR = 6.5% + 5% + 4%

RR = 15.5%