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:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company.

Advertising Expense

Costs incurred in promoting products, services, or the brand as a whole, typically classified as operating expenses on the income statement.

Gross Sales

The total sales generated by a business before any deductions are made for returns, allowances, and discounts.

Indirect Advertising Expenses

Costs not directly associated with specific advertising campaigns but related to broader promotional activities, such as salaries of marketing staff or general promotional materials.