Factor Models

Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart '

Factor Expected Value Actual Value

GDP .0000734 $19,571 $19,843

Inflation .90 2.6% 2.7%

Interest rates .32 3.4% 3.2%

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

b. Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on this stock?