Question
Suppose that we have identified two important systemic risk factors: the growth rate of gross domestic product, labeled GDP, and the 30-year bond interest rate,
Suppose that we have identified two important systemic risk factors: the growth rate of gross domestic product, labeled GDP, and the 30-year bond interest rate, labeled BR. Whole Hog Farms, Inc. has a beta of 1.1 on GDP and 0.9 on BR. Whole Hog has an expected stock return on 12%. GDP is expected to be 5.5% and BR 6%. If gross domestic product grows by 3% and 30-year bond rate turns out to be 9%, and no unexpected news specifically concerning Whole Hog occurs, within the Arbitrage Pricing Theory framework, what is your best guess for realized rate of return on Whole Hog stock?
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