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    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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    https://brainmass.com/business/arbitrage-pricing-theory/arbitrage-pricing-theory-apt-128312

    Solution Preview

    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 ...

    Solution Summary

    The solution explains the calculation of systematic and unsystematic risk and total return on the stock using APT

    $2.19

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