8. Consider the following multifactor

/in /by
8.
value:

10.00 points
 
 

Consider the following multifactor (APT) model of security returns for a particular stock.

 

  FactorFactor BetaFactor Risk Premium
  Inflation1.6              6%             
  Industrial production1.1              7                
  Oil prices0.7              2                

 

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. Omit the “%” sign in your response.)

 

  Expected rate of return[removed] %  

 

b.

Suppose that the market expected 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. Omit the “%” sign in your response.)

 

  FactorExpected Rate of ChangeActual Rate
of Change
  Inflation8%              7%             
  Industrial production7                 8                
  Oil prices5                 0                

 

  Expected rate of return[removed] %