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?

Question

Sanaa Stephenson

Business

21 February, 06:36

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?

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Answers (1)

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Guillermo Hays · Answer 1

The new rate of return is 15.4%

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%