Investments

Analyst reports have identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%.

However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock’s return? “A15.90%B12.90%C13.20%D12%

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An investor may buy into the bond market when prices are dropping because they can be sold for a profit when prices rise. There is an inverse relationship between price and yield of fixed-income securities so when interest rates fall, bond prices rise. An investor who wishes to profit in this manner will need to purchase bonds when interest rates are high and sell when rates decline. Yes or No

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