Suppose that two factors have been identified for the U.S.

  

1. Suppose that two factors have been identified for the U.S. economy: thegrowth rate of industrial production, IP, and the inflation rate, IR. IP isexpected to be 3%, and IR 3.3%. A stock with a beta of 1.8 on IP and 1.3on IR currently is expected to provide a rate of return of 15%. If industrialproduction actually grows by 6%, while the inflation rate turns out to be5.2%, what is your revised estimate of the expected rate of return on thestock? (Do not round intermediate calculations. Round your answer to1 decimal place. Omit the "%" sign in your response.)2.Assume that security returns are generated by the single-index model,Ri = i + iRM + eiwhere Ri is the excess return for security i and RM is the markets excess return. The risk-freSuppose also that there are three securities A, B, and C, characterized by the following dataSecurityABCi1.51.71.9E(Ri)(ei)6%81029%1524If M = 26%, calculate the varianceof returns of securities A, B, and C.(Do not round intermediatecalculations. Round youranswers to the nearest wholenumber.)VarianceSecurity ASecurity BSecurity CNow assume that there are an infinite number of assets with returncharacteristics identical to those of A, B, and C, respectively. What will bethe mean and variance of excess returns for securities A, B, and C?(Enter the variance answers as a percent squared and mean as apercentage. Do not round intermediate calculations. Round youranswers to the nearest whole number. Omit the "%" sign in yourresponse.) Security ASecurity BSecurity CMean%Variance3.Consider the following multifactor (APT) model of security returns for a particular stock.FactorFactor BetaInflation1.4Industrial production 1.0Oil prices0.6Factor RiskPremium6%74a If T-bills currently offer a 9% yield, find the expected rate of return on this stock if the ma. stock as fairly priced. (Do not round intermediate calculations. Round your answer tplace. Omit the "%" sign in your response.)Expected rate of return%b Suppose that the market expected the values for the three macro factors given in colum. that the actual values turn out as given in column 2. Calculate the revised expectations freturn on the stock once the "surprises" become known. (Do not round intermediate caRound your answer to 1 decimal place. Omit the "%" sign in your response.)FactorInflationIndustrial productionOil pricesExpected Rate ofChange8%64Expected rate of return4.%Actual Rateof Change6%80 Suppose that the market can be described by the following three sources of systematic riskassociated risk premiums.FactorIndustrial production (I)Interest rates (R)Consumer confidence (C)Risk Premium6%25The return on a particular stock is generated according to the following equation:r = 15% + 1.4I + 0.7R + 0.90C + ea1.Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 7%. (Do not roundintermediate calculations. Omit the "%" sign in your response.)Equilibrium rate of return%a-2. Is the stock over or underpriced?5.Assume that security returns are generated by the single-index model,Ri = i + iRM + eiwhere Ri is the excess return for security i and RM is the markets excess return. The risk-freSuppose also that there are three securities A, B, and C, characterized by the following dataSecurityABCi0.81.01.2E(Ri)10%1214(ei)25%1020a If M = 20%, calculate the variance of returns of securities A, B, and C. (Do not round in. calculations. Round your answers to the nearest whole number.)VarianceSecurity ASecurity BSecurity C b Now assume that there are an infinite number of assets with return characteristics identi. A, B, and C, respectively. What will be the mean and variance of excess returns for secuand C? (Enter the variance answers as a percent squared and mean as a percentaground intermediate calculations. Round your answers to the nearest whole numbe"%" sign in your response.)Security ASecurity BSecurity CMean%%%Variance