Suppose you currently expect the stock in Example 10.1 to earn a 10% rate of return. Then some macroeconomic news suggests that GDP growth will come in at 5% instead of 4%. How will you revise your estimate of the stock's expected rate of return? Example 10.1 Factor Models To illustrate the factor model, suppose that the macro factor, F. represents news about the state of the business cycle, which we will measure by the unexpected percentage change in gross domestic product (GDP). The consensus is that GDP will increase by 4% this year. Suppose also that a stock's value is 1,2 . If GDP increases by only 3%, then the value CHAPTER 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return of F would be 1%, representing a 1% disappointment in actual growth versus expected growth. Given the stock's beta value, this disappointment would translate into a return on the stock that is 1.2% lower than previously expected. This macro surprise, together with the firm-specific disturbance, e1, determines the total departure of the stock's return from its originally expected value. Concept Check 10.1 Suppose you currently expect the stock in Example 10.1 to earn a 10% rate of retum. Then some macroeconomic news suggests that GDP growth will come in at 5% instead of 4%. How will you revise your estimate of the stock's expected rate of return