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Expected return for stock sirius and stock antares

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Reference no: EM133113882

You have determined that securities in the market are priced in accordance with a 3-factor model and following the Arbitrage Pricing Theorem (APT). The 3 factors are oil prices, interest rates, and GDP growth. The risk-free rate is estimated to be 3%. You are considering two stocks: Sirius and Antares. You have collected the following information about the betas of the two stocks for the 3 risk factors as well as the factor risk premiums.

Factor

Oil Prices

Interest rates

GDP growth

Stock Sirius Beta

1.5

1.2

0.5

Stock Antares Beta

0.5

2.0

1.0

Factor Risk Premium

2.3%

7.0%

3.0%
  1. What is the expected return for stock Sirius and stock Antares? 
  2.  Fast forward a few months - you see that the values of the 3 factors turned out to be different from expectations as follows. Determine the impact (i.e. the change) of the return of stock Sirius due to the "surprise" in the economic factors. 

Economic factor

Expected value

Actual value

Oil Prices

15%

21%

Interest rates

2%

1.5%

GDP growth

4%

2%

Reference no: EM133113882

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