Question: QUESTION 1 SBP's researcher has been given a task to estimate the return of a stock using two factor model. After careful analysis of the

QUESTION 1

SBP's researcher has been given a task to estimate the return of a stock using two factor model. After careful analysis of the macro-economic data, she has concluded that two influential factors for her estimation are the interest rate and GNP growth rate. Whereby, interest rate is expected to be 3.1 percent and expected GNP growth is 3.6 percent. The particular stock has betas of 1.3 and 2.75 on the GNP growth rate and the interest rate respectively. Assume that the stock's expected return is 12 percent, find out the revised expected return on the stock when the actual growth in GNP is 3.2 percent and interest rate is 3.4 percent

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