Reference no: EM132569665
Suppose that you have determined that to estimate the expected returns of Stock 1,2, and 3, there are three important macro-economic factors namely: Inflation, economic growth, and interest rates. The γs' are 2.8% for inflation, 3.5% for GDP growth and 4.8% for the interest rates. If the following relationship holds for these stocks:
E(R1)=(1.55) lnf + (0.80)GDP + (0.05)lnt
E(R2)=(0.81) lnf + (1.25)GDP - (0.20)lnt
E(R3)=(0.73)lnf -(0.14)GDP + (1.24)lnt
i) What are the expected returns for each of the three stocks next year?
ii) If they pay a dividend of Rs. 1 by the end of next year, and are currently traded for Rs. 150, what are the expected values of these stocks next year?
iii) If you construct a portfolio having these three stocks (1,2, & 3) with 20% invested in stock 1, 25% invested in stock 2, and remaining amount invested in stock 3. What is your portfolio's expected return?
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