Question

The expected return for exposure to aluminum commodity prices is 10%, and the firm has a beta relative to aluminum commodity prices of .5. The expected return for exposure to GDP changes is 12%, and the firm has a beta relative to GDP of .75. If the risk-free rate is 4%, what is the expected return on this stock?

Answer 1

Answer:

18%

Explanation:

Data provided in the question:

Expected return for exposure to aluminum commodity prices = 10%

Risk-free rate = 4%

Beta of aluminum commodity prices = 0.5

Expected return for exposure to GDP changes = 12% = 0.12

Beta relative to GDP = 0.75

Now,

Expected return on this stock

= Risk-free rate + ∑(Beta × Return)

= 4% + ( 0.5 × 10% ) + ( 0.75 × 12% )

= 4% + 5% + 9%

= 18%