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Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production(I) 6

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.

Factor

Risk Premium

Industrial production(I)

6 %

Interest rates (R)

3

Consumer confidence(C)

5

The return on a particular stock is generated according to the following equation:

r= 12 % +0.6 I +0.4R+0.8C +e

If the t-bill rate is 3 %, calculate alpha.

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