7. Suppose the market can be described by the following three sources of systematic risk. Each factor in

the following table has a mean value of zero (so factor values represent realized surprises relative to

prior expectations), and the risk premiums associated with each source of systematic risk are given in

the last column.

Systematic Factor Risk Premium

Industrial production, IP 6%

Interest rates, INT 2

Credit risk, CRED 4

The excess return, R, on a particular stock is described by the following equation that relates realized

return to surprises in the three systematic factors:

R = 6% + 1.0 IP + 0.5 INT + 0.75 CRED + e

Find the equilibrium expected return on this stock using the APT. Is the stock overpriced or underpriced?