As a security analyst for Citicorp based in London, you have identified the following model for Deutsche

Question:

As a security analyst for Citicorp based in London, you have identified the following model for Deutsche Bank: E[r] =  + TermFTerm + RiskFRisk + SpotFSpot. Deutsche Bank's expected euro return if all factors equal to their expectation is  = 10%. Factors and factor sensitivities in euros are
Factor Beta
FTerm: long minus short government bonds Term = + 0.08
FRisk: corporate minus government bonds Risk = - 0.10
FSpot: change in the euro value of the dollar Spot = - 0.02
a. What is Deutsche Bank's in a year when each factor is 4 percent higher than its expectation?
b. If Deutsche Bank's stock price rises by 16 percent during this period, by how much does it over- or underperform its expectation given each factor was 4 percent higher than its expectation?
Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...