d. e. Exhibit 7.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor b Stock Y Z Factor 1 Loading -0.55 -0.10 0.35 Factor 2 Loading 1.2 0.85 0.5 The zero-beta return (0) = 3 percent, and the risk premia are 2 = 10 percent and 22 = 8 percent. Assume all three stocks are currently priced at $50. 45. Refer to Exhibit 7.9. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are a. $53.55, $54.4, and $55.25. b. $45.35, $54.4, and $55.25. c. $55.55, $56.35, and $57.15. d. 850, $50, and $50. e. $51.35, $47.79, and $51.58. Exhibit 7.9 Average Excess Monthly Rates of Return Compared to Systematic Risk during Alternative Time Periods A. January 1931-September 1939 B. October 1939-June 1948 Average Excess Monthly Returns Average Excess Monthly Returns 0.11 0.11 0.10 Intercept -0.008 0.10 Intercept -0.004 Standard Error 0.002 Standard Error - 0.001 0.08 Slope 0.030 0.08 Slope -0.011 Standard Error = 0.002 Standard Error -0.001 0.06 F 0.06 0.04 0.04 0.02 0.02 0.00 0.00 -0.02 0.0 0.5 1.0 1.5 2.0 Systematic Risk C. July 1948-March 1957 Average Excess Monthly Retums 0.11 0.10 Intercept -0.008 Standard Error 0.001 0.08 Slope -0.003 Standard Error -0.001 0.06 -0.02 0.0 0.5 1.0 1.5 2.0 Systematic Risk D. April 1957-December 1965 Average Excess Monthly Returns 0.11 0.10 Internet -0.010 Standily Error -0.001 0.08 Slope -0.001 Standard Error -0.0005 0.06 0.04 0.04 0.02 0.02 0.00 0.00 -0.02 0.0 0.5 -0.02 0.0 0.5 1.0 1.5 20 Systematic Risk 2.0 1.0 1.5 Systematic Risk Source: Michael C. Jensen, ed., Studies in the Theory of Capital Markets (New York: Praeger Publishers, 1972): 96-97. Reprinted with permission