Suppose that the market can be described by the following three sources of systematic risk...
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Finance
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
| Factor | Risk Premium | ||
| Industrial production (I) | 8 | % | |
| Interest rates (R) | 5 | % | |
| Consumer confidence (C) | 7 | % | |
The return on a particular stock is generated according to the following equation:
r = 19% + 0.7I + 0.4R + 0.60C + e
a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 8%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)
Equilibrium rate of return ____%
a-2. Is the stock over- or underpriced?
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