Quick Check Assignment 1| Business & Finance homework help
The stock price of Crisp Trucking was modeled by an analyst using the two-factor model APT. The expected return for the first factor is 12 % and that of the second is 8 %. If bi1=0.7, and bi2= 0.9, what is Crisp’s required return?
The Arbitrage Pricing Theory (APT) suggests that an asset’s required return can be determined by considering several factors such as macroeconomic variables, interest rates, and other market indices. We have in this example two factors: the r1 factor with a fractional weight of 0.7, and the r2 factor with a fractional weight of 0.9.
Therefore to calculate Crisp’s required rate of return we need to consider both these weights in addition to their associated expected returns:
Required Return = Risk Free Rate + Beta 1 x (Expected Return – Risk Free Rate) + Beta 2 x (Expected Return – Risk Free Rate)
By substituting values for the equations, we get:
Required Return = % + 0.7 x (12% – % )+ 0.9 x (8% – % )
The word “which” is a shorthand for:
Refund Required = 10%