Problem:
Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta of 1.0 on IP and .4 on IR currently is expected to provide a rate of return of 14%.
Required:
Question: If industrial production actually grows by 5%, while the inflation rate turns out to be 7%, what is your best guess for the rate of return on the stock?
Note: Provide support for rationale.