12. APT (S8.4) Consider a three-factor APT model. The factors and associated risk premiums are Factor Risk
Question:
12. APT (S8.4) Consider a three-factor APT model. The factors and associated risk premiums are Factor Risk Premium (%)
Change in gross national product (GNP) +5 Change in energy prices −1 Change in long-term interest rates +2 Calculate expected rates of return on the following stocks. The risk-free interest rate is 7%.
a. A stock whose return is uncorrelated with all three factors.
b. A stock with average exposure to each factor (b = 1 for each).
c. A pure-play energy stock with high exposure to the energy factor (b = 2) but zero exposure to the other two factors.
d. An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.5 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.)
Step by Step Answer:
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans