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12 July, 20:57

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 %

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  1. 12 July, 22:11
    0
    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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