Find the expected rate of return

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Problem 1:  Consider the following multifactor (APT) model security returns for a particular stock.

Factor

Factor Beta

Factor Risk Premium

Inflation

1.6

6%

Industrial production

1.1

7

Oil prices

0.7

2

a. If T-Bills currently offer a 5% yield, find the expected rate of return on this stick if the market views the stock as fairly priced.

b. Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known.

Factor

Expected Rate of Change

Actual Rate of Change

Inflation

8%

7%

Industrial production

7

8

Oil prices

5

0

Reference no: EM13751643

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