9. Suppose that the market can be described by the following three sources of systematic risk...
9.
|
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) | 7% |
| Interest rates (R) | 2 |
| Consumer confidence (C) | 5 |
| The return on a particular stock is generated according to the following equation: |
| r = 19% + 0.8I + 0.4R + 0.50C + e |
| a-1. |
Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 5%. (Do not round intermediate calculations. Omit the "%" sign in your response.) |
| Equilibrium rate of return | % ? |
| a-2. | Is the stock over- or underpriced? |
|
Homework Answers
a-1. Equilibrium rate of return on this stock =Risk free
rate+0.8*IP+0.4*R+0.50*C =3%+0.8*7%+0.4*2%+0.50*5% =11.90%
Equilibrium Rate of return using APT =11.90%
a-2. Since Expected Return of 19% is less than equilibrium rate
hence the stock is overpriced Option a is correct option
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