Suppose That We Have Identified Three Important Systematic Risk Factors

Multiple Choice

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production.In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively.However,actual growth in these factors turns out to be 1%,-2%,and 2%.The factor betas are given by βEX = 1.8,βI = 0.7,and βIP = 1.0. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.Assume expected return on the stock is 6%.

A) 4%
B) 5%
C) 6%
D) 7%
E) 8%