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Risk Premium of a factor portfolio (%) Suppose that the market can be described by the following four sources of systematic risk with associated risk premiums: Factor Industrial Production (I) Interest rates (R) Consumer confidence (C) Inflation rate (F) 4 5 2 3 The return on a particular well-diversified portfolio is generated according to the following equation fp = 10% + 21 +1R +0.5C+1.2F where I, RC, and F are unanticipated components in Industrial Production. Interest rates, Consumer confidence, and inflation rate, respectively. The T-bill rate is 3% 1. Find the efficient rate of return of this portfolio using the APT. 2. Is the stock over- or under-priced? Explain. Risk Premium of a factor portfolio (%) Suppose that the market can be described by the following four sources of systematic risk with associated risk premiums: Factor Industrial Production (I) Interest rates (R) Consumer confidence (C) Inflation rate (F) 4 5 2 3 The return on a particular well-diversified portfolio is generated according to the following equation fp = 10% + 21 +1R +0.5C+1.2F where I, RC, and F are unanticipated components in Industrial Production. Interest rates, Consumer confidence, and inflation rate, respectively. The T-bill rate is 3% 1. Find the efficient rate of return of this portfolio using the APT. 2. Is the stock over- or under-priced? Explain

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