Posted by Rick on Thursday, October 28, 2010 at 11:20am.
15. Suppose that the following version of the APT is a good model of rick in the stock market. Consider three factors: the stock market’s excess return in percentage points, the change over the last year in the price of oil in dollars, and the spread between 10 year treasury bounds and three-month treasury bills in percentage points. Suppose that the stock market average excess return is 9% and that the average risk-free interest rate is 1%, the average change in the price of oil is $0.25 and the average spread between 10 year treasury bonds and three month treasury bills is 1.25. Each of the following stocks has the beta coefficients shown in the table below:
B1i B2i B3i
Armstrong 1.5 -0.5 0.8
McDonald’s 1.0 -0.2 0.6
Shell Oil .03 1.5 0.4
a. What is the expected return to each of the three stocks?
b. If the market’s excess return were to be above average by 1%, what would you expect the effect to be on the return to each of the three stocks?
c. If the price of oil were to fall by $3.00 in a particular year, that is, $3.25 less than the average change of +$0.25, what would you expect the effect to be on the return to each of the three stocks?
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