QUESTION 10:

Suppose that the market can be described by the following four sources of systematic risk with associated risk premiums: Factor Risk Premium of a factor portfolio (%) Industrial Production (I) 4 Interest rates (R) 5 Consumer condence (C) 2 Inflation rate (F) 3 The return on a particular welldiversied portfolio is generated according to the following equation rP = 10% + 2I + 1R + 0.5C+1.2F where I, R, C, and F are unanticipated components in Industrial Production, Interest rates, Consumer condence, and inflation rate, respectively. The Tbill rate is 3% Find the ecient rate of return of this portfolio using the APT. Is the stock over or under- priced? Explain.

Suppose that the market can be described by the following four sources of systematic risk with associated risk premiums: Factor Risk Premium of a factor portfolio (%) Industrial Production (I) 4 Interest rates (R) 5 Consumer confidence (C) 2 Inflation rate (F) 3 The return on a particular well-diversified portfolio is generated according to the following equation Ip= 10% + 21 + 1R +0.5C+1.2F where I, R, C, and F are unanticipated components in Industrial Production. Interest rates. Consumer confidence, and inflation rate, respectively. The T-bill rate is 3% 1. Find the efficient rate of return of this portfolio using the APT. 2. Is the stock over- or under-priced? Explain. Suppose that the market can be described by the following four sources of systematic risk with associated risk premiums: Factor Risk Premium of a factor portfolio (%) Industrial Production (I) 4 Interest rates (R) 5 Consumer confidence (C) 2 Inflation rate (F) 3 The return on a particular well-diversified portfolio is generated according to the following equation Ip= 10% + 21 + 1R +0.5C+1.2F where I, R, C, and F are unanticipated components in Industrial Production. Interest rates. Consumer confidence, and inflation rate, respectively. The T-bill rate is 3% 1. Find the efficient rate of return of this portfolio using the APT. 2. Is the stock over- or under-priced? Explain