Suppose the Following Version of the APT Is a Good $$\begin{array} { l l l l } & \beta ^ { 1 i } & \beta ^ { 2 i } & \beta ^ { 3 i } \\\text { Microsoft } & 2 & - 1 & 1\end{array}$$

question 33

Essay

Suppose the following version of the APT is a good model of risk in the stock market.There are three factors: (1) the stock market's excess return, in percentage points; (2) the unemployment rate minus its natural rate (the level the unemployment rate would be if the economy were at full employment), in percentage points; and (3) the real federal funds rate minus its long-run equilibrium value.Suppose the natural rate of unemployment is 4.5 percent and the long-run equilibrium value of the real federal funds rate is 3.0 percent.Each of the following stocks has the beta coefficients shown in the table below: $$\begin{array} { l l l l } & \beta ^ { 1 i } & \beta ^ { 2 i } & \beta ^ { 3 i } \\\text { Microsoft } & 2 & - 1 & 1\end{array}$$
$$\begin{array} { l l l l } \text { Goldcrafters } & 3 & 2 & - 1 \\\text { State Farm } & 0 & - 2 & 0\end{array}$$
If your forecast for next year is that the risk-free interest rate next year will be 1.0 percent,
a.the overall stock market will return 10.0 percent, the unemployment rate will be 5.0 percent, and the real federal funds rate will be 2.0 percent, what is the expected return (in percent,
with two decimals) to each of the three stocks? Show your calculations.
If your forecast for next year is that the risk-free interest rate next year will be 2.0 percent,
b.the overall stock market will return 20.0 percent, the unemployment rate will be 4.0 percent, and the real federal funds rate will be 4.0 percent, what is the expected return (in percent,
with two decimals) to each of the three stocks? Show your calculations.

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Definitions:

Surface Ocean Currents

Movements of ocean water that occur at or near the ocean's surface, driven by wind, the Coriolis effect, differences in temperature and salinity, and the shape of ocean basins.

Ocean Basins

The deep and extensive depression of the Earth's surface that contains the world's ocean waters, surrounded by continental landmasses.

Counter Currents

Oceanographic phenomena where adjacent slivers of water move in opposite directions, significantly affecting climate and marine life.

Coriolis Effect

The apparent deflection of moving objects, like air or ocean currents, to the right in the northern hemisphere and to the left in the southern hemisphere, due to Earth's rotation.