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PLEASE SHOW YOUR WORK. Assume that the market can be described by two sources of systematic risk. The table below lists the two sources of
PLEASE SHOW YOUR WORK.
Assume that the market can be described by two sources of systematic risk. The table below lists the two sources of systematic risk and the corresponding risk premiums:
Factor Risk Premium
GDP (G) 2%
Unemployment (U) 3%
You determine that the return on Stock B is generated by the model: r = 9% + 0.8G + 1.2U + e a) Use the APT (Arbitrage Pricing Theory) to calculate the equilibrium rate of return on Stock B. The risk-free rate is 3%. b) Is Stock B underpriced or overpriced? Explain. (Explanation Required)
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