Working with a two-factor APT model an investor has found two risk factors, X and Y. The investor is looking at two stocks, A and B. The expected return on stock A is 12% and that of stock B 10%. The beta (factor sensitivity) of stock A with respect to X is 1 and with respect to Y it is 1/2. The beta of stock B with respect to X is 0 and with respect to Y it is 2. The risk free rate is 4%. What are the risk premia of factors X and Y?
expected return = risk free rate +beta 1*factor 1 + beta 2 *factor 2
for stock A
12=4+1*X+1/2*Y
for stock B
10 = 4+0*X+2*Y
Y = 3
substituting value of Y in stock X equation
12=4+1*X+1/2*3
X = 6.5
Working with a two-factor APT model an investor has found two risk factors, X and Y. The investor...
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I am needing to know how to calculate the following questions in excel.Consider a three-factor APT model. The factors and associated risk premiums are:Factor Risk PremiumChange in GNP 5%Change in energy prices 1Change in long-term interest rates 2Calculate 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...
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