You are exploring the use of APT in making investment choices. You have identified three factors labelled F1, F2, and F3 with corresponding risk premia RP1 = 4%, RP2 = 5%, and RP3 = 2%. A stock with ticker ABC has historically shown returns which have followed the equation: rABC=0.12+.75F1+1.0F2+.5F3+eABC c. If the expected price next year will be $56, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?
You are exploring the use of APT in making investment choices. You have identified three factors labelled F1, F2, and F3 with corresponding risk premia RP1 = 4%, RP2 = 5%, and RP3 = 2%. A stock with ticker ABC has historically shown returns which have followed the equation: rABC=0.12+.75F1+1.0F2+.5F3+eABC c. If the expected price next year will be $56, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?
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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INV 2-3c
You are exploring the use of APT in making investment choices. You have identified three factors labelled F1, F2, and F3 with corresponding risk premia RP1 = 4%, RP2 = 5%, and RP3 = 2%.
A stock with ticker ABC has historically shown returns which have followed the equation:
rABC=0.12+.75F1+1.0F2+.5F3+eABC
c. If the expected price next year will be $56, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?
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