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The stock of Arbor Pet Trees (APT) is priced based on the given systematic risk factors....

The stock of Arbor Pet Trees (APT) is priced based on the given systematic risk factors. Estimated sensitivities to these risk factors are given by the betas of the regression RAPT – Rrf = βcreditRcredit + βvalue Rvalue + α + ε Factor Risk Premium Beta Credit Risk 5.6% 1 Valuation Risk 3.8% 0.3 Risk-free rate 2.1% If the actual return is 9.2%, what is the value of alpha?

Solutions

Expert Solution

In order to find alpha following procedure needs to be followed,

Fair Return = Risk free rate + Beta*Risk premium

= 2.1%+ 5.6%*1+3.8%*0.3

=8.84%

now, alpha = Actual Return - Fair Return

= 9.2%-8.84%

=0.36%

jeff jeffy answered 2 years ago
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