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R-6% + 101P + .5 INT + .75 CRED + 0 overpriced O Underpriced
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Answer #1

a. The APT required (i.e. equilibrium) rate of return is given by:
E(r) = 0 + (1 x 6) + (0.5 x 2) + (0.75 x 4) = 10%

a. From the equation given in the question, the expected return on the stock is 6%( (expected surprises on all factors are zero by definition). Because the actually expected return based on risk is less than the equilibrium return, we conclude that the share is overpriced.

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