a) When choosing the appropriate group of risk factors to include in a multifactor Arbitrage Pricing...

 

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a) "When choosing the appropriate group of risk factors to include in a multifactor Arbitrage Pricing Theory (APT) model, we must allow for both unsystematic and systematic sources of risk." Comment on this statement, in no more than 100 words. [6 marks] b) Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Stock Expected Return Beta (%) A 11% 0.8 B 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results. [6 marks] [Total 12 marks] a) "When choosing the appropriate group of risk factors to include in a multifactor Arbitrage Pricing Theory (APT) model, we must allow for both unsystematic and systematic sources of risk." Comment on this statement, in no more than 100 words. [6 marks] b) Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Stock Expected Return Beta (%) A 11% 0.8 B 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results. [6 marks] [Total 12 marks]