View the step-by-step solution to:


Consider an economy where the market can be described by three sources of systematic risk (F1,

F2, and F3) with associated risk premiums RP1 = 5%, RP2 = 2%, and RP3 = 4%. The return on stock ABC is generated according to the following equation:


Assume that the stock is currently priced at $50 per share and T-bill rate is 5%.

1.     What is the equilibrium rate of return for stock ABC using the APT? 

2.     Is stock ABC underpriced or overvalued? Explain

3.     If the expected price next year will be $56, what is the stock price now that will not allow for arbitrage profits?

4.     Assume that the T-bill rate decreases to 3%, with the other variables remaining unchanged.  Would you recommend to buy or sell stock ABC?

Top Answer

1 Equilibrium rate = 15.13%. 2 Security is... View the full answer

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question