Chapter 12, Problem 3QAP

a

Summary Introduction

Adequate information:

Beta of growth in GNP $\left({\text{β}}_{\text{GNP}}\right)$ = 1.47

Beta of inflation $\left({\text{β}}_{\text{Inf}}\right)$ = -0.87

Expected value of growth in GNP $\left({\text{EV}}_{\text{GNP}}\right)$ = 1.9%

Expected value of inflation $\left({\text{EV}}_{\text{Inf}}\right)$ = 3.2%

Actual value of growth in GNP $\left({\text{AV}}_{\text{GNP}}\right)$ = 2.4%

Actual value of inflation $\left({\text{AV}}_{\text{Inf}}\right)$ = 3.6%

To compute: Systematic risk of the stock

Introduction: Systematic risk refers to the risk that is non-diversifiable that is inherent to the entire market.

b

Summary Introduction

Adequate information:

Old market share $\left({\text{MS}}_{\text{Old}}\right)$ = 11%

New market share $\left({\text{MS}}_{\text{New}}\right)$ = 15%

Increase in stock return for every 1% increase in market share $\left({\text{In}}_{\text{SR}}\right)$ = 0.58%

To compute: Unsystematic risk

Introduction: Unsystematic risk refers to the risk that is specific to a company. Such type of risks is diversifiable.

c

Summary Introduction

Adequate information:

Expected return on the stock $\left({\text{ER}}_{\text{S}}\right)$ = 10.5%

Systematic risk $\left(\text{m}\right)$= 0.39%

Unsystematic risk $\left(\text{ε}\right)$= 2.32%

To compute: Total return on the stock

Introduction: Total return refers to the return that a stock earns after the consideration of all types of risks.