Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Risk Premium Factor Industrial production (I) Interest rates (R) Consumer confidence (C) Required: 8% 4 7 The return on a particular stock is generated according to the following equation: r = 17% +0.9/+0.5R+0.70 C+ e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%. Note: Do not round intermediate calculations. Round your answer to 1 decimal place. a-2. Is the stock over- or underpriced? a-1. Equilibrium rate of return a-2 Is the stock over- or underpriced? %
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Risk Premium Factor Industrial production (I) Interest rates (R) Consumer confidence (C) Required: 8% 4 7 The return on a particular stock is generated according to the following equation: r = 17% +0.9/+0.5R+0.70 C+ e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%. Note: Do not round intermediate calculations. Round your answer to 1 decimal place. a-2. Is the stock over- or underpriced? a-1. Equilibrium rate of return a-2 Is the stock over- or underpriced? %
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 25P
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Transcribed Image Text:Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Risk Premium
Factor
Industrial production (I)
Interest rates (R)
Consumer confidence (C)
Required:
8%
4
7
The return on a particular stock is generated according to the following equation:
r = 17% +0.9/+0.5R+0.70 C+ e
a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 3%.
Note: Do not round intermediate calculations. Round your answer to 1 decimal place.
a-2. Is the stock over- or underpriced?
a-1. Equilibrium rate of return
a-2 Is the stock over- or underpriced?
%
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