What is the expected return on the stock of arbor pet trees

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Reference no: EM132206410

Question - The stock of Arbor Pet Trees (APT) is priced based on the given systematic risk factors. Estimated sensitivities to these risk factors are given by the betas of the regression

R_APT - R_rf = β_creditR_credit + β_valueR_value + α + ε

Factor	Risk Premium	Beta
Credit Risk	5%	1.5
Valuation Risk	4%	0.4
Risk-free rate	2%

a) What is the expected return on the stock of Arbor Pet Trees if the stock is fairly valued?

b) If the actual return is 11%, what is the value of alpha?

c) Based on parts a) and b), is APT undervalued, overvalued, or fairly valued?

Reference no: EM132206410

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