8.S Consider the following multifactor

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8.
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Consider the following multifactor (APT) model of security returns for a particular stock.


 

  FactorFactor BetaFactor Risk Premium
  Inflation0.9              8%             
  Industrial production0.5              11                
  Oil prices0.2              7                


 

a.

If T-bills currently offer a 4% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit the "%" sign in your response.)


 

  Expected rate of return[removed] %  


 

b.

Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. (Do not round intermediate calculations. Round your answer to 1 decimal place. Omit the "%" sign in your response.)


 

  FactorExpected Rate of ChangeActual Rate
of Change
  Inflation7%              5%             
  Industrial production5                 7                
  Oil prices3                 0                
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