In a given market, three factors impact stock returns: GDP growth, oil prices,

and exchange rates. A particular stock has the following sensiltivities to these

factors:

P

PRK$2...$

Sensitivity to GDP growth: $0\mathrm{.}80,$ Sensitivity to oil prices: $0\mathrm{.}60,$ Sensitivity to exchange rates:

$\mathrm{.}30$

$0..$

The risk premiums for these factors are:

Risk premium for GDP growth: $4\%,$ Risk premium for all prices: $2\%,$ Risk premium for

exchange rates: $1\mathrm{.}5\%$

The risk$-$free rate in the market is $1\mathrm{.}5\%,$ Another stock with the same sensitivities is

offering an expected retum of $12\%$

Question:

Is there an arbitrage opportunity in this market? lf yes, explain why

You

Answers:

Step $1$: Calculate the Expected Return Using APT