A researcher has determined that a two-factor model is appropriate to determine the return on a stock.

Question:

A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.6 percent, and the interest rate is expected to be 3.1 percent. A stock has a beta of 1.3 on the percentage change in GNP and a beta of 2.75 on the interest rate. If the expected rate of return on the stock is 12 percent, what is the revised on the stock if GNP actually grows by 3.2 percent and the interest rate is 3.4 percent?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...