Question

Suppose that the market can be described by the following three sources of systematic risk with...

Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.

Factor Risk Premium
Industrial production (I) 8%
Interest rates (R) 4
Consumer confidence (C) 6

The return on a particular stock is generated according to the following equation:

r = 16% + 1.6I + 0.8R + 1.30C + e

a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Equilibrium rate of return            %

a-2. Is the stock over- or underpriced?

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