CA Final · Advanced Financial Management · Portfolio Management
A share's return follows the factor model R = E(R) + 1.5×F1 − 0.5×F2 + e, where F1 is the surprise in GDP growth and F2 is the surprise in inflation. Expected return is 11%. This year GDP growth is 1 percentage point below expectation, inflation is 2 percentage points above expectation, and the firm-specific component e is +0.8%. What is the actual return?
The actual return is 9.3%. Start with the expected 11%, subtract 1.5 for the GDP shortfall, subtract 1.0 for the inflation surprise (negative sensitivity), and add the firm-specific 0.8%: 11 − 1.5 − 1 + 0.8 = 9.3%.
- A9.3%Correct
- B8.5%
- C11.3%
- D12.3%
Explanation
F1 = −1, F2 = +2. R = 11 + 1.5×(−1) − 0.5×(2) + 0.8 = 11 − 1.5 − 1 + 0.8 = 9.3%. Option 8.5% omits the firm-specific component. Option 11.3% reverses the sign of the inflation effect, and 12.3% reverses the GDP effect.
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