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Factor model for stock returns

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Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented into eh following chart:

Factor B Expected Value Actual Value
Growth in gnp 2.04 1.8% 2.6%
Inflation -1.15 4.3 4.8

a. What is the systematic risk of the stock return?
b. The firm announced that its market share had unexpectedly increased from 23 percent to 27 percent. Investors know from past experience that the stock return will increase by .45 percent for every 1 percent increase in its market share. What is the unsystematic risk of the stock?
c. What is the total return on this stock?

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This solution provides a factor model for stock returns.

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a. What is the systematic risk of the stock return?

The systematic risk is due to unanticipated factor movements and cannot be diversified away. The unanticipated movement is the difference in the expected value and the actual ...

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