Question

The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure
to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?
A.14.4 percent
B.10.0 percent
C.13.6 percent
D.11.5 percent Please show work

Answer 1

Answer:

C.13.6 percent

Explanation:

         GDP   Market   STOCK      

ER    7,2% 2,4% 13,6% Expected Return of Investment    Rf                                  4,00% Risk-Free Rate    

Bi      1,2     0,6     1,0     Beta of the Investment    

(Erm-Rf) 6,00% 4,00% 9,60% Market Risk Premium    

It's necessary to calculate how much impact each item has with the corresponding Beta in the stock  

Then, to know the impact of exposure to the Aluminum market, we have to multiply the risk premium of 4% by the beta of 0,6  

Then, to know the impact of the exposure to GDP, we do the same procedure, we multiply the risk premium of GDP by the beta of 1,2.    

With these calculations we reach how much of the return on this stock corresponds to the market and then we add 4% of risk free.