Question: A researcher has determined that a two-factor model is appropriate to determine the return on stock. The factors are the percentage change in GNP and
A researcher has determined that a two-factor model is appropriate to determine the return on stock. The factors are the percentage change in GNP and in interest rate. GNP is expected to grow by 3.5 percent and the interest rate is expected to be 2.9 percent. A stock has a beta of 1.3 on the percentage change in GNP and a beta of -.47 on the interest rate. If the expected rate of return on the stock is 10.2 percent, what is the revised expected return on the stock if GNP grows by 3.2 percent and the interest rate is 2.7 percent?
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