Question
In: Finance
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 the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the “surprises” become known. (Do not round intermediate calculations. Round your answer to 1 decimal place.)
| Factor | Expected Value | Actual Value | ||
| Inflation | 7% | 5% | ||
| Industrial production | 5% | 6% | ||
| Oil prices | 2% | 0% | ||
Expected rate of return = ?%
Solutions
jeff jeffy answered 1 year 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 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...
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
factor APT and the CAPM. What is a key shortcoming of the
multifactor APT? How does this key shortcoming compare to CAPM
implications?
Consider a single factor APT. Portfolio A has a beta of 1.5 and an expected return...
Consider a single factor APT. Portfolio A has a beta of 1.5 and
an expected return of 24%. Portfolio B has a beta of 0.9 and an
expected return of 13%. The risk-free rate of return is 4%. An
arbitrage portfolio in which you take a position in a combination
of the highest beta portfolio and the risk-free asset, and an
opposite position in the other risky portfolio would generate a
rate of return of ______%.
Consider the single factor APT. Portfolio A has a beta of 1.1 and an expected return...
Consider the single factor APT. Portfolio A has a beta of 1.1
and an expected return of 23%. Portfolio B has a beta of .6 and an
expected return of 19%. The risk-free rate of return is 6%. If you
wanted to take advantage of an arbitrage opportunity, you should
take a short position in portfolio __________ and a long position
in portfolio _________.
A;B
B;A
B;B
A;A
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...
Factor Models Suppose a factor model is appropriate to describe the returns on a stock. The...
Factor Models Suppose a factor model is appropriate to describe
the returns on a stock. The current expected return on the stock is
10.5 percent. Information about those factors is presented in the
following:
Factor
B
Expected Value
Actual Value
Growth in GNP
1.67
2.1%
2.6%
Inflation
-1.09
4.3
4.8
a. What is the systematic risk of the stock return?
b. The firm announced that its market share had unexpectedly
increased from 11 percent to 15 percent. Investors know from...
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