solution

Consider the following multifactor (APT) model of security returns for a particular stock.

Factor	Factor Beta	Factor Risk Premium
Inflation	1.3	6	%
Industrial production	0.8	8
Oil prices	0.5	5

a. If T-bills currently offer a 8% 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.)

	Expected rate of return %

b. Suppose that the market expects 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.)

Factor	Expected Value		Actual Value
Inflation	7	%	6	%
Industrial production	4		7
Oil prices	3		0

	Expected rate of return %