Suppose an analyst examines expected return for the Broad Band Company (BBC) base on a 2-factor model. Initially, the expected return for BBC equals 10%.The analyst identifies GDP and 10-year interest rates as the two factors for the factor model. Assume the following data is used: GDP growth consensus forecast = 6%
Interest rate consensus forecast = 3%
GDP factor beta for BBC = 1.5
Interest rate factor beta for BBC = -1.00
Suppose GDP ends up growing 5% and the 10-year interest rate ends up equaling 4%.Also assume that during the period, the Broad Band Company unexpectedly experiences shortage of key inputs, causing its revenues to be less than originally expected. Consequently, the firm-specific return is -2% during the period .Using the 2-factor model with the revised data。
which of the following expected returns for BBC is correct?
A. 1.5%.
B. 3.5%.
C. 5.5%.
D. 6.5%.
Answer:C
RBBC = E(RBBC) + b BBC,GDpFGDP +b BBC，lRFIR + eBBC
RBBC = 0.10 + 1. 5(-0.01) 一1(0.01) - 0.02 = 0.055 = 5.5%