# Question

You are using the arbitrage pricing model to estimate the expected return on Bethlehem Steel and have derived the following estimates for the factor betas and risk premia:

a. Which risk factor is Bethlehem Steel most exposed to? Is there any way, within the arbitrage pricing model, to identify the risk factor?

b. If the risk-free rate is 5%, estimate the expected return on Bethlehem Steel.

c. Now assume that the beta in the capital asset pricing model for Bethlehem Steel is 1.1 and that the risk premium for the market portfolio is 5%. Estimate the expected return, using the capital asset pricing model.

d. Why are the expected returns different using the two models?

a. Which risk factor is Bethlehem Steel most exposed to? Is there any way, within the arbitrage pricing model, to identify the risk factor?

b. If the risk-free rate is 5%, estimate the expected return on Bethlehem Steel.

c. Now assume that the beta in the capital asset pricing model for Bethlehem Steel is 1.1 and that the risk premium for the market portfolio is 5%. Estimate the expected return, using the capital asset pricing model.

d. Why are the expected returns different using the two models?

## Answer to relevant Questions

The following equation is reproduced from the study by Fama and French of returns between 1963 and 1990. Rt = 0.0177 − 0.11 ln (MV) + 0.35 ln (BV∕MV) where MV is the market value of equity in hundreds of millions of ...Assume that you have half of your money invested in Times Mirror, the media company, and the other half invested in Unilever, the consumer product giant. The expected returns and standard deviations on the two investments ...You have run a regression of monthly returns on Amgen, a large biotechnology firm, against monthly returns on the S&P 500 Index, and come up with the following output: Rstock = 3.28% + 1.65 RMarket R2 = 0.20 The current one ...The chief financial officer of Adobe Systems, a software manufacturing firm, has approached you for some advice regarding the beta of his company. He subscribes to a service that estimates Adobe System’s beta each year, ...You have been given the following information on a project: • It has a five-year lifetime • The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a ...Post your question

0