Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c }
\text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \
\hline \mathbf { X } & - 0.55 & 1.2 \
\mathbf { Y } & - 0.10 & 0.85 \
\mathbf { Z } & 0.35 & 0.5
\end{array}$$
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. 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

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \
\hline \mathbf { X } & - 0.55 & 1.2 \
\mathbf { Y } & - 0.10 & 0.85 \
\mathbf { Z } & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. 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

The expected return for each stock can be calculated using the formula: Expected Return = λ₀ + (Factor 1 Loading * λ₁) + (Factor 2 Loading * λ₂). For stock X: 3% + (-0.55 * 10%) + (1.2 * 8%) = 7.1%. For stock Y: 3% + (-0.10 * 10%) + (0.85 * 8%) = 8.8%. For stock Z: 3% + (0.35 * 10%) + (0.5 * 8%) = 10.5%. The expected prices are then calculated by multiplying the current price by (1 + expected return). For stock X: $50 * 1.071 = $53.55. For stock Y: $50 * 1.088 = $54.4. For stock Z: $50 * 1.105 = $55.25.

Exhibit 7-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)