Problem suppose that the market can be described by the, Finance Basics

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Problem suppose that the market can be described by the

Problem: Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.

Factor	Risk Premium
Industrial Production (I)	7%
Interest Rates (R)	4
Consumer Confidence (C)	6

The return on a particular stock is generated according to the following equation

r = 15% = 1.1/ = 0.6R + 0.90C = e

a. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 7%.

b. is the stock over- or underpriced?

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Finance Basics: Problem suppose that the market can be described by the

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