Question

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.Factor Risk PremiumIndustrial Production (l) 8%Interest Rates (R) 5Consumer Confidence (C) 7The return on a particular stock is generated according to the following equation:r = 19% + 0.7I + 0.4R + 0.60C + eFind the equilibrium rate of return on this stock using the APT. The T-bill rate is 8%. (Do not round intermediate calculations. Omit the "%" sign in your response.)Equilibrium rate of return ______%????

Answer 1

The equilibrium rate of return on this stock using the APT is 19.80%.

Step-by-step explanation:

According to given data described in the question, In order to calculate the the equilibrium rate of return using the APT, we would have to use the following formula:

E(rj) = rf + bj1RP1 + bj2RP2 + bj3RP3 + bj4RP4 + ... + bjnRPn

Therefore, Equilibrium rate of return = 8% + 0.7*8%+0.4*5%+0.6*7%

= 19.80%

The equilibrium rate of return on this stock using the APT is 19.80%.