Question
In: Finance
Consider the following multifactor (APT) model of security returns for the Happy Halloween (H) Company. Factor...
Consider the following multifactor (APT) model of security
returns for the Happy Halloween (H) Company.
|
Factor |
Factor Beta |
Factor Risk Premium |
Expected Value |
Actual Value |
|
Interest rate |
1.4 |
-1% |
2% |
|
|
GDP Growth |
0.9 |
6% |
3% |
|
|
Oil Prices |
0.2 |
2% |
1% |
What do the factor risk premiums imply about the actual values observed for the risk factors?
If the risk-free asset is paying a 3% return, find the expected rate of return on Happy Halloween given the above information.
Suppose the Trick or Treat (T) Company had factor betas of 0.8, 1.2 and 0.6 for interest rate, GDP growth and oil prices, respectively. If you invested 40% of your assets into Happy Halloween and 60% of your assets into Trick or Treat, what would be the expected return of the resulting portfolio. Also calculate the factor betas for this portfolio for each of the factors.
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jeff jeffy answered 2 years agoRelated Solutions
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following multifactor (APT) model of security
returns for a particular stock.
Factor
Factor Beta
Factor Risk Premium
Inflation
1.1
8
%
Industrial production
0.6
9
Oil prices
0.3
7
a. If T-bills currently offer a 7% yield, find the
expected rate of return on this stock if the market views the stock
as fairly priced. (Do not round intermediate calculations.
Round your answer to 1 decimal place.)
b. Suppose that the market expects the values for
the three...
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following
multifactor (APT) model of security returns for a particular
stock.
Factor
Factor
Beta
Factor Risk
Premium
Inflation
0.8
6%
Industrial
production
0.4
7
Oil prices
0.1
3
a. If
T-bills currently offer a 3% yield, find the expected rate of
return on this stock if the market views the stock as fairly
priced. (Do not round intermediate calculations. Round your
answer to 1 decimal place.)
Expected rate of
return %
?
b.
Suppose that the...
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta...
Consider the following multifactor (APT) model of security
returns for a particular stock.
Factor
Factor Beta
Factor Risk Premium
Inflation
1.0
10%
Industrial production
0.4
12%
Oil prices
0.2
8%
a. If T-bills currently offer a 5% yield, find
the expected rate of return on this stock if the market views the
stock as fairly priced. (Do not round intermediate
calculations. Round your answer to 1 decimal place.)
Expected rate of return = ?%
b. Suppose that the market expects...
Consider the multifactor APT with two factors. Portfolio A has a beta of 1.5 on factor...
Consider the multifactor APT with two factors. Portfolio A has a
beta of 1.5 on factor 1 and a beta of 0.45 on factor 2. The risk
premiums on the factor 1 and 2 portfolios are 12% and 5%,
respectively. The risk-free rate of return is 3%. The expected
return on portfolio A is Answer if no arbitrage opportunities
exist.
Discuss the advantages of the multifactor APT over the single factor APT and the CAPM. What...
Discuss the advantages of the multifactor APT over the single
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implications?
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%)...
Consider a three-factor APT model. The factors and associated
risk premiums are: Factor Risk Premium (%) Change in gross national
product (GNP) +5.7 Change in energy prices 0.3 Change in long-term
interest rates +2.7 Calculate expected rates of return on the
following stocks. The risk-free interest rate is 5.5%. A stock
whose return is uncorrelated with all three factors. (Enter your
answer as a percent rounded to 1 decimal place.) A stock with
average exposure to each factor (i.e., with...
Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%)...
Consider a three-factor APT model. The factors and associated
risk premiums are:
Factor
Risk Premium (%)
Change in GNP
+5.6
Change in energy prices
–1.6
Change in long-term interest rates
+2.6
Calculate expected rates of return on the following stocks. The
risk-free interest rate is 5.6%.
a. A stock whose return is uncorrelated with
all three factors. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal
place.)
Expected rate of return
%
b. A...
Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 8.0 Interest rate −.6...
Consider the following simplified APT model:
Factor
Expected Risk
Premium (%)
Market
8.0
Interest rate
−.6
Yield spread
5.1
Factor Risk Exposures
Market
Interest Rate
Yield Spread
Stock
(b1)
(b2)
(b3)
P
1.6
–1.1
–.4
P2
1.6
0
.7
P3
.3
.7
1.0
Consider a portfolio with equal investments in stocks P,
P2, and P3. Assume rf =
5%.
a. What are the factor risk exposures for the
portfolio? (A negative answer should be indicated by a
minus sign. Do...
Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 6.3 Interest rate −.5...
Consider the following simplified APT model:
Factor
Expected Risk
Premium (%)
Market
6.3
Interest rate
−.5
Yield spread
4.9
Factor Risk Exposures
Market
Interest Rate
Yield Spread
Stock
(b1)
(b2)
(b3)
P
1.1
−1.9
−.3
P2
1.3
0
.4
P3
.3
.6
.9
Calculate the expected return for each of the stocks shown in
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not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places.)
Expected return P...
Explain the Two-Factor model by Merton. Compare the APT with the CAPM
Explain the Two-Factor model by Merton.
Compare the APT with the CAPM
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