Question
You are exploring the use of APT in making investment choices. You have identified three factors labelled F 1 , F 2 , and F
You are exploring the use of APT in making investment choices. You have identified three factors labelled F1, F2, and F3 with corresponding risk premia RP1 = 3%, RP2 = 6%, and RP3 = 2%.
A stock with ticker ABC has historically shown returns which have followed the equation:
rABC=0.14+.50F1+1.20F2+.8F3+eABC
- What is the equilibrium rate of return for stock ABC using the APT, if the T-bill rate is 5%?
- If the price of stock ABC is $21, do you conclude that it is underpriced or overvalued? Explain your reasoning fully.
- If the expected price next year will be $23, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?
- Assume that the T-bill rate decreases to 3%, with the other variables remaining unchanged. Would you recommend to buy or sell stock ABC?
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Mergers, Acquisitions and Other Restructuring Activities
Authors: Donald DePamphilis
8th edition
9780128024539, 128013907, 978-0128013908
