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 + e a-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.)
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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 + e
a-1. Find the equilibrium
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