# Equilibrium rate of return using APT

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.

https://brainmass.com/economics/general-equilibrium/equilibrium-rate-return-apt-269124

#### Solution Preview

Under APT

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

Equilibrium return = 5% + 1.5 ...

#### Solution Summary

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

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