Suppose that the market can be described by the following three sources of systematic risk with associated
Question:
Factor Risk Premium
Industrial production (I) ........ 6%
Interest rates (R) ........... 2
Consumer confidence (C) ........ 4
The return on a particular stock is generated according to the following equation:
r = 15% + 1.0I + .5R + .75C + e
Find the equilibrium rate of return on this stock using the APT. The Tbill rate is 6%. Is the stock over or underpriced? Explain.
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The APT required ie equilibrium rate of return on the stock based on r f and the factor ...View the full answer
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