If T-bills currently offer a 7% yield, find the expected rate of return on this
ID: 2745771 • Letter: I
Question
If T-bills currently offer a 7% 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.)
Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit the "%" sign in your response.)
please include work and please follow rounding rules.
Consider the following multifactor (APT) model of security returns for a particular stock.Explanation / Answer
Answer for subpoint a:
Expected return =Risk free rate+ Beta for each factor * Risk premium for each factor.
=7% +1.2*6%+0.7*8%+0.4*4%
=21.4.
Answer for subpoint b:
Revised expected rate of return =Risk free rate+ Beta for each factor * Actual Risk premium for each factor
=7%+5% *1.2+0.7*9%+0%*0.4
=19.3