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5. Suppose that the market can be described by the following three sources of svstematic risk. Th...

5. Suppose that the market can be described by the following three sources of svstematic risk. The risk premium of each hedge

5. Suppose that the market can be described by the following three sources of svstematic risk. The risk premium of each hedge portfolio is also given Factor Premium Industrial Production 0 0 Interest rates (R) 0 Consumer confidence 4% Regressing stock x's return on the three factors, we have the following equation r 15% + l.OJ + 0.5R + 0.75C + e where e is the residual and I, R, and C' are all demeaned variables(mean i zero). The T-bill rate is 6%. 1) Find the equilibrium rate of return of this stock predicted by APT. 2) Is the stock x over-or underpriced compared to APT? 3) Based on APT, is there an "alpha" term? If yes, compute the alpha.
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