Arbitrage Pricing Theory (APT)
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Suppose a factor model is appropriate to describe the returns on a stock. Information about those factors is presented in the following chart.
FACTOR BETA OF EXPECTED ACTUAL
FACTOR VALUE (%) VALUE (%)
Growth in GNP 2.04 3.5% 4.8%
Interest Rates -1.90 14.0 15.2
Stock return 10.0
a. What is the systematic risk of the stock return?
b. The firm announcement that its market share had unexpectedly increased from 23% to 27 %. Investors know from their past experience that the stock return will increase by 0.36 percent pr an increase of 1 percent in its market share. What is the unsystematic risk of the stock?
c. What is the total return of the stock?
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Solution Summary
The solution explains the calculation of systematic and unsystematic risk and total return on the stock using APT
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Systematic risk is risk that cannot be diversified away through formation of a portfolio. Generally, systematic risk factors are those factors that affect a large number of firms in the market, however, those factors will not necessarily ...
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