Question

Suppose two factors are identified for the U.S. 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 to provide a rate of return of 14%. If industrial production actually grows by 6%, while the inflation rate turns out to be 9%, what is your best guess for the rate of return on the stock?

Answer 1

The revised estimate on the rate of return on

the stock would be 17.2%

Step-by-step explanation:

The revised estimate on the rate of return on

the stock would be 17.2%

• Before

• 14% = α +[5%*1] + [7%*0.6]

α = 4.8%

• With the changes:

• 4.8% + [6%*1] + [9%*0.6]

The new rate of return is 17.2%