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What is the equilibrium rate of return for stock abc

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You are exploring the use of APT in making investment choices. You have identified three factors labelled F123123, F, and F with corresponding risk premia RP = 5%, RP = 3%, and RP = 3%.

A stock with ticker ABC has historically shown returns which have followed the equation:

rABC=0.13+1.0F1+.90F2+1.5F3+eABC

Question 1. What is the equilibrium rate of return for stock ABC using the APT, if the T-bill rate is 3%?

Question 2. If the price of stock ABC is $45, do you conclude that it is underpriced or overvalued? Explain your reasoning fully.

Question 3. If the expected price next year will be $53, what is the fair price today, that is, the stock price now that will not allow for arbitrage profits?

Question 4. Assume that the T-bill rate decreases to 1%, with the other variables remaining unchanged. Would you recommend to buy or sell stock ABC?

Reference no: EM132894415

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