Suppose the riskless return is 4½% and the factor sensitivities and factor return premiums for BioTherm and the S&P 500 index are given below. Using the APT, what should be the required returns for BioTherm shares and for the S&P 500 Stock index? Risk factor BioTherm factor sensitivity S&P 500 factor sensitivity Expected factor return premiums Confidence risk 0.15 0.30 2.70% Time horizon risk 0.70 0.56 ─0.70% Inflation risk ─0.40 ─0.35 ─4.30% Business-cycle risk 1.45 1.75 1.50% Market-timing risk 1.20 1.00 3.60%
Suppose the riskless return is 4½% and the factor sensitivities and factor return premiums for BioTherm and the S&P 500 index are given below. Using the APT, what should be the required returns for BioTherm shares and for the S&P 500 Stock index? Risk factor BioTherm factor sensitivity S&P 500 factor sensitivity Expected factor return premiums Confidence risk 0.15 0.30 2.70% Time horizon risk 0.70 0.56 ─0.70% Inflation risk ─0.40 ─0.35 ─4.30% Business-cycle risk 1.45 1.75 1.50% Market-timing risk 1.20 1.00 3.60%
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
Related questions
Question
Suppose the riskless return is 4½% and the factor sensitivities and factor return premiums for BioTherm and the S&P 500 index are given below. Using the APT, what should be the required returns for BioTherm shares and for the S&P 500 Stock index?
|
Risk factor |
BioTherm factor sensitivity |
S&P 500 factor sensitivity |
Expected factor return premiums |
|
Confidence risk |
0.15 |
0.30 |
2.70% |
|
Time horizon risk |
0.70 |
0.56 |
─0.70% |
|
Inflation risk |
─0.40 |
─0.35 |
─4.30% |
|
Business-cycle risk |
1.45 |
1.75 |
1.50% |
|
Market-timing risk |
1.20 |
1.00 |
3.60% |
Expert Solution
Step 1
Required returns = Rik less Return + (Factor Sensitivity * Expected Factor Return Premiums)
Step 2
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education