Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long term interest rates. Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%. You are analyzing a stock is that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the stock's return?
A. 15.9%
B. 12.9%
C. 13.2%
D. 12.0%
E[r new ] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(0.5) = 12.9%
Please write the steps and formulas
Please do not use excel