Q1

a.

b.

For the stock you analyzed in Question 5, is the stock overpriced or underpriced?

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 and the risk premiums associated with each source of systematic risk are given in the last column. The risk-free rate is 4%. Systematic Factor Risk Premium Industrial production (IP) 6% 2% Interest rates (INT) Credit risk (CRED) 4% The return, r, on a particular stock is described by the following equation that relates realized returns to surprises in the three systematic factors: r= 10% + 1.0 IP +0.5 INT +0.75 CRED+e What is the equilibrium expected return on this stock using the APT? Your