Question
In: Finance
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 the table above. Assume rf = 4.8%. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
| Expected return P | % |
| Expected return P | % |
| Expected return P3 | % |
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 2 years agoRelated Solutions
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,
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a. What are the factor risk exposures for the
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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
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a. A stock whose return is uncorrelated with
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Enter your answer as a percent rounded to 1 decimal
place.)
Expected rate of return
%
b. A...
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Consider an APT world with one systematic risk: MARKET risk.
Expected return for the market portfolio is 8% and risk-free rate
is 2%. A stock analyst estimates the following characteristics for
the Portfolio ABC. Assume that the analyst estimates are
correct.
Portfolio
E(R)
Market BETA
ABC
11.0%
1.8
What is the NO-ARBITRAGE (i.e. in equilibrium) expected return for
portfolio ABC?
10.0%
10.5%
11.0%
12.0%
12.8%
Consider a two factor model of expected returns where the risk free rate is 6% and the expected risk premiums on the factor portfolios are 3% and 7%.
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Assume the risk-free rate of interest is 5% and the expected return on the market is...
Assume the risk-free rate of interest is 5% and the expected
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line (SML) to guide your decision, which of the following
statements is true?
a.
The vertical intercept of the SML will be 7%.
b.
The project’s IRR of 17% falls on the SML.
c.
The project’s IRR of 17% falls below...
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
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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...
a). What is the market risk premium if the risk free rate is 5% and the...
a). What is the market risk premium if the risk free rate is 5%
and the expected market return is given as follows?
State of nature
Probability
Return
Boom
20%
30%
Average
70%
15%
Recession
10%
5%
b). A firm is evaluating two projects that are mutually
exclusive with initial investments and cash flows as follows:
Project A
Project B
Initial Investment
End-of-Year Cash Flows
Initial Investment
End-of-Year Cash Flows
RM40,000
RM 20,000
RM 90,000
RM 40,000
RM 20,000
RM...
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