Factor Models Suppose a factor model is appropriate to describe stock returns for a company, with information about these factors set out in the table below. The expected return on the stock is 10.5 per cent.

Factor β Expected Value Actual Value GNP growth 2.05 3% 3.5%

Inflation −2 5.5% 5%

(a) What is the systematic risk of the stock return?

(b) The firm announced that its market share had unexpectedly increased from 23 per cent to 27 per cent.
Investors know from past experience that the stock return will increase by 0.36 per cent for every 1 per cent increase in its market share. What is the unsystematic risk of the stock?

(c) What is the total return on this stock?