Problem: Consider the C. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and a beta of 0.8 on factor 2. Stock B has an expected return of 15%, a beta of 0.9 on factor 1 and a beta of 1.2 on factor 2.
The risk premium on the factor 1 portfolio is 3%. The risk-free rate of return is 6%.
a) What is the risk-premium on factor 2 if stock A is correctly priced?
b) What the no-arbitrage return for stock B should be?
c) Is stock B over- or under-priced? Explain (in a short sentence)
d) According to APT can arbitrage opportunity for B persist for long time? Explain (in a short sentence)