Question 19

Using an arbitrage pricing theory (APT) model, what is the expected return for a stock given the following factor betas and factor exposures? Assume the risk-free rate is equal to 2%.

Factor betas:

• Standardized probability of default: 0.5.
• Standardized average daily trading volume: −0.2.
• Standardized average earnings growth forecast: 1.5.

Expected factor exposures:

• Standardized probability of default: 2%.
• Standardized average daily trading volume: −1%.
• Standardized average earnings growth forecast: 1.5%.