Consider the following multifactor(APT) model of security
Question # 00431271
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Updated on: 11/28/2016 01:42 AM Due on: 11/28/2016
Consider the following multifactor(APT) model of security returns for a particular stock
FACTOR FACTOR BETA FACTOR RISK PREMIUM
inflation 1.1 9%
industrial production 0.7 11
oil prices 0.3 7
If t-bills currently offers a 6% yield, find the expected rate of return on this stock, if the market views the stock as fairly priced.
Expected rate of return: ?
Suppose that the market expected the values for the three macro factors given in column 1 below, but the actual values turns out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known.
FACTOR EXPECTED RATE OF CHANGE ACTUAL RATE OF CHANGE
inflation 7% 3%
industrial production 6 7
oil prices 4 0
Expected rate of return: ?
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Solution: Consider the following multifactor(APT) model of security