204k views
4 votes
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 6% and IR 7%. A stock with a beta of 1 on IP and 0.7 on IT currently is expected to provide a rate of return of 15%. If industrial production actually grows by 7%, while the inflation rate turns out to be 9%, what is your best guess for the rate of return on the stock?

User Regeme
by
7.9k points

1 Answer

3 votes

Answer:

The new rate of return is 15.4%

Step-by-step explanation:

The revised estimate on the rate of return on

the stock would be:

• Before

• 14% = α +[4%*1] + [6%*.4]

α = 7.6%

• With the changes:

• 7.6% + [5%*1] + [7%*.4]

The new rate of return is 15.4%

User Jeff Tilton
by
8.3k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.