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 = 5%, RP2 = 3%, and RP3 = 3%.
A stock with ticker ABC has historically shown returns which have followed the equation:
rABC=0.13+1.0F1+.90F2+1.5F3+eABC
- What is the equilibrium rate of return for stock ABC using the APT, if the T-bill rate is 3%?
- If the price of stock ABC is $45, do you conclude that it is underpriced or overvalued? Explain your reasoning fully.
- If the expected price next year will be $53, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?
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Financial Markets and Institutions
Authors: Jeff Madura
12th edition
9781337515535, 1337099740, 1337515531, 978-1337099745
