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Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium Change in GNP 5% Change in energy prices -1 Change in long-term interest rates +2 Calculate expected rates of return on the following stocks. The ris

05 / 03 / 2018 Assignment

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Consider a three-factor APT model. The
factors and associated risk premiums are:

Factor Risk
Premium

Change in GNP 5%

Change in energy prices -1

Change
in long-term interest rates +2

Calculate expected rates of return
on the following stocks. The risk-free interest rate is 7%.

a. A stock whose return is
uncorrelated with all three factors.

b. A
stock with average exposure to each factor (i.e., with b = 1 for each).

c. A
pure-play energy stock with high exposure to the energy factor (b = 2) but zero
expo- sure to the other two factors.

d. An aluminum company stock with
average sensitivity to changes in interest rates and GNP, but negative exposure
of b = -1.5 to the energy factor. (The aluminum company is energy-intensive and
suffers when energy prices rise.)


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