# Equilibrium rate of return using APT

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1. Suppose the market can be described by the following three sources of systematic risk with associated risk premiums.

Factor Risk Premium

Industrial production (I) 7%

Interest rates ( R) 3

Consumer confidence ( C) 5

The return on a particular stock is generated according to the following equation:

R = 10% + 1.5 I + 0.6 R + .70 C + e

Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 5%.

Is the stock over- or under-priced? Explain.

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##### Solution Summary

The solution explains how to calculate the equilibrium rate of return using APT.

##### Solution Preview

Under APT

Equilibrium return = Risk free rate + 1.5 I + 0.6 R + .70 C

Equilibrium return = 5% + 1.5 ...

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