QUESTION 17 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 fp = 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. QUESTION 17 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 fp = 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