You would like to use the Arbitrage Pricing Theorem (APT) to price securities in financial...
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You would like to use the Arbitrage Pricing Theorem (APT) to price securities in financial markets. To do so, you have decided that there are 3 relevant risk factors to consider, GNP growth, interest rates, and market returns. You are examining two stocks, Mars and Venus. Stock Mars has the following beta values for the three factors respectively (GNP growth: 1.1 interest rates 2.0, market returns: 0.5). Stock Venus has the following beta values for the three factors respectively (GNP growth: 0.7, interest rates: 1.0, market returns: 1.5). In addition, the risk-free rate is estimated to be 1%, and the 3 factors have the following factor risk premiums (GNP growth: 2%, interest rates: 1%, and market returns: 5%). a) Determine the expected returns for stocks Mars and Venus. (4 marks)
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