Consider the following multifactor (APT) model of security returns for a particular stock. Factor Beta Factor...

    

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Consider the following multifactor (APT) model of security returns for a particular stock. Factor Beta Factor Risk Premium 6% 8% 3% Factor Inflation Industrial production Oil prices 1.2 0.5 0.3 1. If T-bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. [1pt] 2. In APT. we assume a factor to asset returns: which implies that R, = E(R.) +₁F1+ B₂F₂+B3F3 + €8 E(R₂) =R +3₁RP(F₁) + 3₂RP(F₁) +33RP(F1). Here, F₁, F₂ and F3 are surprises to macro factors. Thus. APT can predict the expected return of stock s, and also predict the how the realization of the return R, due to surprises in macro factors F₁,F2 and F3. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. [1pt] Factor Inflation Industrial production Oil prices Expected Value 5% 3% 2% Actual Value 4% 6% 0% Please indicate whether the following statements are true or false. In case of a false statement. briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities. Consider the following multifactor (APT) model of security returns for a particular stock. Factor Beta Factor Risk Premium 6% 8% 3% Factor Inflation Industrial production Oil prices 1.2 0.5 0.3 1. If T-bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. [1pt] 2. In APT. we assume a factor to asset returns: which implies that R, = E(R.) +₁F1+ B₂F₂+B3F3 + €8 E(R₂) =R +3₁RP(F₁) + 3₂RP(F₁) +33RP(F1). Here, F₁, F₂ and F3 are surprises to macro factors. Thus. APT can predict the expected return of stock s, and also predict the how the realization of the return R, due to surprises in macro factors F₁,F2 and F3. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. [1pt] Factor Inflation Industrial production Oil prices Expected Value 5% 3% 2% Actual Value 4% 6% 0% Please indicate whether the following statements are true or false. In case of a false statement. briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.

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1 To calculate the expected rate of return on the stock when the market views it as fairly priced we can use the APT model Expected Return RiskFree Rate Factor Beta1 Factor Risk Premium1 Factor Beta2 ... View the full answer