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Consider the following multifactor (APT) model of security returns for a particular stock.



Factor Factor Beta Factor Risk Premium
Inflation 1.6 6%
Industrial production 1.1 7
Oil prices 0.7 2


a.
If T-bills currently offer a 5% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit the "%" sign in your response.)



Expected rate of return %

Respuesta :

Answer:

23.7%

Explanation:

The computation of the expected rate of return is shown below:

As we know that

The expected rate of return is

Expected Rate of Return = Risk free Rate + (Factor Beta × Factor Risk Premium)

= 5% + (1.6 × 6% + 1.1 × 7% + 0.7 × 2%)

= 5% + 9.6% + 7.7% + 1.4%

= 23.7%

We simply apply the above formula to determine the expected rate of return

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