Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 8% Factor Inflation Industrial production Oil prices Factor Beta 1.1 0.6 0.3 a. If T-bills currently offer a 7% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Answer is complete but not entirely correct. 19.0 % Expected rate of return 9 7

Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 8% Factor Inflation Industrial production Oil prices Factor Beta 1.1 0.6 0.3 a. If T-bills currently offer a 7% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Answer is complete but not entirely correct. 19.0 % Expected rate of return 9 7

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider the following multifactor (APT) model of security returns for a particular stock. Factor Inflation Industrial production Oil prices Expected rate of return Factor Beta 1.8 1.3 0.9 a. If T-bills currently offer a 9% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Factor Inflation Industrial production Oil prices Expected rate of return % b. 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. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Expected Value 5% Factor Risk Premium 7% 4 2 10 6 % Actual Value 3% 6 0
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Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 7% Factor Inflation Industrial production Oil prices Factor Beta 1.4 0.9 0.6 Required: a. If T-bills currently offer a 4% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. b. 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. Expected Value 5 6% 5 3 Actual Value 4% 7 0 Factor Inflation Industrial production Oil prices Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place. X Answer is complete but not entirely correct. a. Expected rate of return 24.9 % b. Expected rate of return 9.6 X %
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Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. 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 + 0.5R + 0.75C + ea-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 6%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)

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