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Assume two factors have been identified as the important sources of systematic risk: the growth rate in industrial production, IP, and the rate of change in the price of West Texas crude oil, OIL. Suppose also that the expected return on a well-diversified IP factor portfolio, E(rIP) is 8% and E(rOIL) is 12%. Now consider the Low Ride Automobile Co. with βIP = 1.3 and βOIL = -0.2. Assume rf = 6%. Within an Arbitrage Pricing Theory framework, what is the fair rate of return on Low Ride?

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Financial Management, Finance

Category:- Financial Management
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