USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
The zero-beta return ($\lambda$0) = 3 percent, and the risk premia are $\lambda$1 = 10 percent and $\lambda$2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. The expected prices one year from now for stocks X, Y, and Z are
A) $53.55, $54.4, $55.25
B) $45.35, $54.4, $55.25
C) $55.55, $56.35, $57.15
D) $50, $50, $50
E) $51.35, $47.79, $51.58.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
  The zero-beta return ($\lambda$0) = 3 percent, and the risk premia are $\lambda$1 = 10 percent and $\lambda$2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. The expected prices one year from now for stocks X, Y, and Z are
A) $53.55, $54.4, $55.25 
B) $45.35, $54.4, $55.25 
C) $55.55, $56.35, $57.15 
D) $50, $50, $50 
E) $51.35, $47.79, $51.58.

Quizplus · Accepted Answer

To calculate the expected price of each stock one year from now, we can use the following formula:
Expected Price = Current Price x (1 + Risk Premium x Factor Loading)
For stock X: 
Expected Price = $50 x (1 + 0.1 x 0.8) = $53.55
For stock Y: 
Expected Price = $50 x (1 + 0.1 x 1.2) = $54.4
For stock Z: 
Expected Price = $50 x (1 + 0.08 x 0.5) = $55.25
Therefore, the best choice is A, which includes the correct expected prices for all three stocks.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the Three

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the Three