EBK PRINCIPLES OF CORPORATE FINANCE
EBK PRINCIPLES OF CORPORATE FINANCE
12th Edition
ISBN: 9781259358487
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 8, Problem 17PS

APT Consider a three-factor APT model. The factors and associated risk premiums are

Chapter 8, Problem 17PS, APT Consider a three-factor APT model. The factors and associated risk premiums are Calculate

Calculate expected rates of return on the following stocks. The risk-free interest rate is 7%.

  1. a) A stock whose return is uncorrelated with all three factors.
  2. b) A stock with average exposure to each factor (i.e., with b = 1 for each).
  3. c) A pure-play energy stock with high exposure to the energy factor (b = 2) but zero exposure to the other two factors.
  4. d) An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = –1.5 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.)
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