szabo.istvan123
New Member
Hello, everybody!
I'd have a question relating the APT model. I've just solved a problem, but some points was not completely clear to me. The problem is the following:
Let's consider the following multifactor (APT) model of security returns for a particular stock:
Factor: Factor Beta Factor Risk Premium
Inflation 1,2 6%
Industrial product 0,5 8%
Oil prices 0,3 3%
The first question was: "If T-bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced." To this question I gave the answer 18,1% which is said to be correct by the textbook.
The second question was: "Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the “surprises” become known."
Factor: Expected rate of change Actual rate of change
Inflation 5% 4%
Industrial product 3% 6%
Oil prices 2% 0%
And this is the point where my question comes up: why is the expected rate of change 5% for the inflation, 3% for the industrial product and 2% for the oil prices, if the text stated that "Factor Risk Premium" should be 6%, 8% and 3% for the inflation, industrial product and oil prices? Is "Factor Risk Premium" not the same as the expected rate of change of the given factor? I thought they should be the same because the Factor Portfolio has a beta = 1. What am I missing here?
Thank you for your answers in advance!
Steve
I'd have a question relating the APT model. I've just solved a problem, but some points was not completely clear to me. The problem is the following:
Let's consider the following multifactor (APT) model of security returns for a particular stock:
Factor: Factor Beta Factor Risk Premium
Inflation 1,2 6%
Industrial product 0,5 8%
Oil prices 0,3 3%
The first question was: "If T-bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced." To this question I gave the answer 18,1% which is said to be correct by the textbook.
The second question was: "Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the “surprises” become known."
Factor: Expected rate of change Actual rate of change
Inflation 5% 4%
Industrial product 3% 6%
Oil prices 2% 0%
And this is the point where my question comes up: why is the expected rate of change 5% for the inflation, 3% for the industrial product and 2% for the oil prices, if the text stated that "Factor Risk Premium" should be 6%, 8% and 3% for the inflation, industrial product and oil prices? Is "Factor Risk Premium" not the same as the expected rate of change of the given factor? I thought they should be the same because the Factor Portfolio has a beta = 1. What am I missing here?
Thank you for your answers in advance!
Steve
