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Find expected returns on stocks by arbitrage pricing model

The Arbitrage Pricing Model (APM). Suppose a three-factor APM holds and the risk-free rate is 6 percent. You are interested in two particular stocks. A and B. The returns on both stocks are related to factors 1 and 2 as follows.

r = 0.06 + b₁ (0.09) - b₂ (0.03) + b₃ (0.04)

The sensitivity coefficients for the two stocks are given below.

Stock	b₁	b₂	b₂
A	0.70	0.80	0.20
B	0.50	0.04	0.20

Calculate the expected returns on both stocks. Which stock requires a higher return?

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Solution Preview :

Prepared by a verified Expert

Finance Basics: Find expected returns on stocks by arbitrage pricing model

Reference No:- TGS0679096

Have a Question? (oR Write a Review)

Recent Questions Asked Finance Basics

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Solution Preview :

Prepared by a verified Expert

Finance Basics: Find expected returns on stocks by arbitrage pricing model

Reference No:- TGS0679096

Recent Questions Asked Finance Basics

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Q : Determining the vertical analysis

Q : Explain the fixed monthly expenses

Q : How the subsidiary occurs at the combination date

Q : Find expected returns on stocks by arbitrage pricing model

Q : Explain why a negotiated transfer price

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