Factor Models A researcher has determined that a two-factor model is appropriate to determine the return of a stock. The factors are the percentage change in GNP and an interest rate.

GNP is expected to grow by 3 percent, and the interest rate is expected to be 4.5 percent. A stock has a beta of 1.2 on the percentage change in GNP and a beta of 0.8 on the interest rate.

If the expected rate of return for the stock is 11 percent, what is the revised expected return of the stock if GNP actually grows by 4.2 percent and interest rates are 4.6 percent?

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