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