Question: Consider the following simplified APT model (compare Tables 8.3 and 8.4): Calculate the expected return for the following stocks. Assume r f = 5 percent.

Consider the following simplified APT model (compare Tables 8.3 and 8.4):

Estimated Risk Premium* Factor (rtactor - r) Yield spread 5.10% Interest rate

-.61 - 59 Exchange rate Real GNP 49 Inflation -.83 Market 6.36

Calculate the expected return for the following stocks. Assume r_f = 5 percent.

Expected Risk Premium (rfactor - r) Factor Risk Factor Risk Premium (b)

Estimated Risk Premium* Factor (rtactor - r) Yield spread 5.10% Interest rate -.61 - 59 Exchange rate Real GNP 49 Inflation -.83 Market 6.36 Expected Risk Premium (rfactor - r) Factor Risk Factor Risk Premium (b) b(rtactor - r) Factor Yield spread 1.04 5.10% 5.30% Interest rate -2.25 -.61 1.37 Exchange rate .70 -.59 -41 GNP .17 49 .08 Inflation -18 -.83 .15 Market 6.36 32 2.04 Total 8.53%

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