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Estimate the expected return on bethlehem steel

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You are using the arbitrage pricing model to estimate the expected return on Bethlehem Steel,and have derived the following estimates for the factor betas and risk premium:

Factor Beta Market Risk Premium

1 1.2 2.5%

2 0.6 1.5%

3 1.5 1.0%

4 2.2 0.8%

5 0.5 1.2%

a. If the risk-free rate is 5%, estimate the expected return on Bethlehem Steel.

b. Now assume that the beta in the capital asset pricing model for Bethlehem Steel is 1.1 and that the market risk premium for the market portfolio is 5%. Estimate the expected return using the CAPM.

c. Why are the expected returns different between the two models?

Reference no: EM132509952

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