Question
9. Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production
9.
| Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. |
| Factor | Risk Premium |
| Industrial production (I) | 7% |
| Interest rates (R) | 2 |
| Consumer confidence (C) | 5 |
| The return on a particular stock is generated according to the following equation: |
| r = 19% + 0.8I + 0.4R + 0.50C + e |
| a-1. | Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 5%. (Do not round intermediate calculations. Omit the "%" sign in your response.) |
| Equilibrium rate of return | % ? |
| a-2. | Is the stock over- or underpriced? |
|
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Financial Markets And Institutions
Authors: Anthony Saunders, Marcia Cornett
5th Edition
0078034663, 978-0078034664
