The macroeconomic research department of a large investment bank uses the arbitrage pricing theory to set up its expectations on equity market performance in the next quarter. It uses the two-factor model based on the short-term interest rate level and the GDP growth rate. The risk-free rate is currently 1%. Short-term interest rate GDP Factor Beta Factor Risk Premium 3% 7% -0.9 1.3 Although market participants do not expect any changes in interest rate, analysts at the bank are strongly confident that there will be an increase of 100 basis points. They also believe the GDP growth rate will beat market expectations by 50 basis points.

The macroeconomic research department of a large investment bank uses the arbitrage pricing theory to set up its expectations on equity market performance in the next quarter. It uses the two-factor model based on the short-term interest rate level and the GDP growth rate. The risk-free rate is currently 1%. Short-term interest rate GDP Factor Beta Factor Risk Premium 3% 7% -0.9 1.3 Although market participants do not expect any changes in interest rate, analysts at the bank are strongly confident that there will be an increase of 100 basis points. They also believe the GDP growth rate will beat market expectations by 50 basis points.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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