The APT results in a 19.80% equilibrium rate of return for this stock.
The following formula would need to be applied in order to determine the equilibrium rate of return using the APT given the facts stated in the question:
E(rj) = rf + bj1RP1, bj2, bj3, bj4,... + bjnRPn
As a result, the equilibrium rate of return is equal to 8% plus 0.7*8% plus 0.4*5% plus 0.6*7%.
= 19.80%
Using the APT, the equilibrium rate of return on this stock is 19.80%.
What is the expected rate of return on a stock with a beta of one if the market's expected return is 15%?
Beta x market expected return = 15%
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