Consider the following simplified APT model:
Factor | Expected Risk Premium |
Market | 6.4% |
Interest rate | –.6 |
Yield spread | 5.1 |
Calculate the expected return for the following stocks. Assume rf = 5%.
Factor Risk Exposures | |||
| Market | Interest Rate | Yield Spread |
Stock | (b1) | (b2) | (b3) |
P | 1.0 | —2.0 | — .2 |
P2 | 1.2 | 0 | .3 |
P3 | .3 | .5 | 1.0 |
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