An analyst has modeled the stock of Crisp Trucking using a two-factor APT model.
ID: 2664875 • Letter: A
Question
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 4%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1= 0.5 and bi2 = 0.8, what is Crisp's required return? Round your answer to two decimal places.
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 4%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1= 0.5 and bi2 = 0.8, what is Crisp's required return? Round your answer to two decimal places.Explanation / Answer
Answer: (The syntax of the ?-calculus is very simple, comprising just four kinds of expression but surprisingly it is sufficient to define any computable function.)
As per the two-factor APT model, the expected return is calculated as follows:
E(R) = ?0 + ?1b1 + ?2b2
E(R) = 6% + (12% X 0.7) + (8% X 0.9)
E(R) = 0.06 + 0.084 + 0.072
E(R) = 21.6%