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Emily, an analyst at Fantastique Computers (FC), models the companys stock assuming that the return...

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Finance

Emily, an analyst at Fantastique Computers (FC), models the companys stock assuming that the return earned on all stocks depends on only three risk factors: inflation, industrial production, and the market's aggregate degree of risk aversion. In today's economy, the risk-free rate ( ) is 8%, while the return on the market portfolio ( ) is 15%. Any remaining relevant data is given in the following table:

Variable :

The required rate of return on an inflation portfolio, 13%

The required return on an industrial production portfolio, 10%

The required return on a risk-bearing portfolio, 6%

Factor sensitivity to the inflation portfolio, 0.9

Factor sensitivity to the industrial production portfolio, 1.2 Factor sensitivity to the risk-bearing portfolio, 0.7

FantastiqueComputerss beta, 1.1

Using an APT model, Emily calculates that FCs required rate of return is:

a) 13.50%

b) 13.00%

c) 15.70%

d) 5.50%

If Emily used the Capital Asset Pricing Model, she would have calculated that FCs required rate of return is:

a) 15.70%

b) 0.30%

c) 13.50%

d) -7.70%

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