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Suppose two risk factors are identified for the economy: the unemployment rate, rUMP , and the rate of inflation, i . It is known that

Suppose two risk factors are identified for the economy: the unemployment rate,rUMP, and the rate of inflation,i. It is known that E[rUMP] = 4% and that E[i] = 3%. An asset withUMP= -0.5 andi= 1.5 has an expected return of 6%. If the realized values turn out to berUMP= 8% andi= 6%, what is yourrevised estimate for the realized asset return?

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