Question

Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: Factor ? Expected Value Actual Value GDP .0009221 $14,311 $14,302 Inflation ?.95 4.4% 4.2% Interest rates ?.52 8.2% 8.0% ________________________________________

a. What is the systematic risk of the stock return? (A negative answer should be indicated by a negative sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Systematic risk of the stock return %

b. Suppose unexpected bad news about the firm was announced that causes the stock price to drop by 1.1 percent. If the expected return on the stock is 14.4 percent, what is the total return on this stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Total return of the stock %

Answer 1

Factors	?	Expected value	Actual value
GDP	0.000922	$14,311	$14,302
Inflation	-0.95	4.40%	4.20%
Interest rates	-0.52	8.20%	8%
(a) What is the systematic risk of the stock return?
Solution: The systematic portion of the return is given by
GDP	-0.008298	( 0.000922*(14302-14311)
Inflation	0.0019	(-0.95*(4.20%-4.40%)
Interest rates	0.00104	(-0.52*(8%-8.20%)
Total	-0.54%
(b)
Solution: The unsystematic return is the return that occurs because of a firmspecific factor such as the bad news about the company.So, the unsystematicreturn of the stock is - 1.1percent. The total return is the expected return, plus the two components of unexpected return: the systematic risk portion of returnand the unsystematic portion. So, the total return of the stock is:
									r=	12.76%	(14.4%-0.54%-1.1%)