Consider the following multifactor(APT) model of security returns for a particular stockFACTOR FACTOR BETA FACTOR RISK PREMIUMinflation 1.1 9%industrial production 0.7 11oil prices 0.3 7

If t-bills currently offers a 6% yield, find the expected rate of return on this stock, if the market views the stock as fairly priced.Expected rate of return: ?Suppose that the market expected the values for the three macro factors given in column 1 below, but the actual values turns out as given in column

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2. Calculate the revised expectations for the rate of return on the stock once the “surprises” become known.FACTOR EXPECTED RATE OF CHANGE ACTUAL RATE OF CHANGEinflation 7% 3%industrial production 6 7oil prices 4 0 Expected rate of return: ?

Alpha and Pricing The risk free rate is 1.7% and the market price of risk is 5.5%. A stock with a beta of 1.2 has an expected dividend yield of 5% and an expected capital gain of 4%. This stock’s alpha is equal to ______ and the stock is ________.-9.55%; underpriced0.7%; underpriced+9.55%; overpriced-0.7%; overpriced

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