Assume You Have a 2-Factor APT Model

question 47

Essay

Assume you have a 2-factor APT model. Factor 1 is GDP growth, with an expected
value of 3.5%. Factor 2 is the percentage change in unemployment, with an expected
value of -2%. The following factor sensitivities have been calculated for Project X: = 3.0; unemployment = -0.1. The risk-free rate is 4%. What does APT indicate
you should require as a return on Project X?

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Definitions:

Classified

In accounting, this term refers to the arrangement of items in financial statements into categorized sections and subsections to enhance clarity and understanding.

Wholly Owned Subsidiary

A company whose entire share capital is 100% owned by another company, the parent company.

Straight-Line Method

A method of calculating depreciation or amortization by equally distributing the cost of an asset over its expected useful life.

Residual Value

The estimated amount that an asset will be worth at the end of its useful life.