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 returns for stock X, stock Y, and stock Z are
A) 3 percent, 8 percent, 10 percent
B) 7.1 percent, 10.5 percent, 8.8 percent
C) 7.1 percent, 8.8 percent, 10.5 percent
D) 10 percent, 5.5 percent, 14 percent
E) 14 percent, 5.5 percent, 12 percent

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 returns for stock X, stock Y, and stock Z are
A) 3 percent, 8 percent, 10 percent 
B) 7.1 percent, 10.5 percent, 8.8 percent 
C) 7.1 percent, 8.8 percent, 10.5 percent 
D) 10 percent, 5.5 percent, 14 percent 
E) 14 percent, 5.5 percent, 12 percent

Quizplus · Accepted Answer

Using the CAPM, we can calculate the expected return for each stock based on its factor loading and the given risk premia. The expected return for stock X is F1F1F1S1F1F1F100 + 11(F1F1F1S1F1F1F101 - F1F1F1S1F1F1F100) = 3% + 11(10% - 3%) = 7.1%. Similarly, the expected return for stock Y is F1F1F1S1F1F1F100 + 7(F1F1F1S1F1F1F101 - F1F1F1S1F1F1F100) = 3% + 7(10% - 3%) = 8.8%, and the expected return for stock Z is F1F1F1S1F1F1F100 + 5(F1F1F1S1F1F1F102 - F1F1F1S1F1F1F100) = 3% + 5(8% - 3%) = 10.5%. Therefore, the correct answer is C.

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

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