- CFA Exams
- CFA Level I Exam
- Study Session 16. Portfolio Management (1)
- Reading 44. Using Multifactor Models
- Subject 2. Factors and types of multifactor models

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**CFA Practice Question**

Assume that a stock's returns are affected by two factors: surprises in inflation and surprises in GDP growth:
R = 8% - 0.5 F

_{infl}+ 1.25F_{GDP}+ εSuppose the error term is 0.6%. If inflation was expected to be 2% but it's actually 2.5%, and the GDP surprises is 0%, the expected return on the stock is ______.

A. 8%

B. 8.25%

C. 8.35%

**Explanation:**The expected return is simply the value of the intercept in the equation. No calculation required.

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**User Contributed Comments**
3

User |
Comment |
---|---|

Kmoore24 |
What about the inflation surprise? |

birdperson |
ya, what? |

epfrndz |
it was asking for the "expected return" which is 8% in this case. If you did any computation then you're going to get a computed return, which is not the expected return. |