Question

Emily, an analyst at Fantastique Computers (FC), modelsthe company’s stock assuming that the return earned on all stocksdepends on only three risk factors: inflation, industrialproduction, and the market's aggregate degree of risk aversion. Intoday's economy, the risk-free rate ( ) is 8%, while the return onthe market portfolio ( ) is 15%. Any remaining relevant data isgiven in the following table:

Variable :

The required rate of return on an inflation portfolio,13%

The required return on an industrial productionportfolio, 10%

The required return on a risk-bearing portfolio,6%

Factor sensitivity to the inflation portfolio,0.9

Factor sensitivity to the industrial productionportfolio, 1.2 Factor sensitivity to the risk-bearing portfolio,0.7

FantastiqueComputers’s beta, 1.1

Using an APT model, Emily calculates that FC’s requiredrate of return is:

a) 13.50%

b) 13.00%

c) 15.70%

d) 5.50%

If Emily used the Capital Asset Pricing Model, she wouldhave calculated that FC’s required rate of return is:

a) 15.70%

b) 0.30%

c) 13.50%

d) -7.70%