Answer: 1%
Explanation:
From the question, we are informed that the risk premium for exposure to exchange rates is 7%, and the firm has a beta relative to exchange rates of 0.4.
We are further told that the risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of 0.8. When the risk-free rate is 3%, the expected return on this stock will be:
= 0.03 + 0.4(0.07) + 0.8(-0.06)
= 0.03 + 0.028 - 0.048
= 0.058 - 0.048
= 0.01
= 1%
