Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
|
Factor |
Risk Premium |
|
Industrial production (I) |
6% |
|
Interest rates (R) |
2 |
|
Consumer confidence (C) |
4 |
The return on a particular stock is generated according to the following equation:
r =15% + 1.0I + .5R + .75C + e
Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 6%. Is the stock over- or underpriced? Explain.