An investor identifies three factors affecting the share price of company A. The data with regard...

An investor identifies three factors affecting the share price of company A. The data with regard to the factors are as follows:

Risk factor sensitivity to factor X return rate from factor X

1 0,7 1,5%

2 1,2 4,0%

3 -0,1 5,0%

Assuming the risk-free rate equal to 3% and utilizing APT model calculate an expected rate of return for company A

Expert Solution

The expected rate of return = Risk-free rate + Summation of [Sensitivity to factor X* Return rate from factor X]

The expected rate of return = 0.03 + 0.7*0.015 + 1.2*0.04 -0.1*0.05

The expected rate of return = 0.0835 = 8.35%

jeff jeffy answered 2 years ago

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