Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: Factor Beta Expected Value Actual Value GDP .0000734 $19,571 $19,843 Inflation -.90 2.6% 2.7% Interest Rates -.32 3.4% 3.2% What is the systematic risk of the stock return? Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on this stock?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
12.2 Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart:
Factor Beta Expected Value Actual Value
Inflation -.90 2.6% 2.7%
Interest Rates -.32 3.4% 3.2%
- What is the systematic risk of the stock return?
- Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on this stock?
Given:
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