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

question 98

Multiple Choice

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. If you know that the actual prices one year from now are stock X $55, stock Y 52, and stock Z $57, then

• A) stock X is undervalued, stock Y is undervalued, stock Z is undervalued.
• B) stock X is undervalued, stock Y is overvalued, stock Z is overvalued.
• C) stock X is overvalued, stock Y is undervalued, stock Z is undervalued.
• D) stock X is undervalued, stock Y is overvalued, stock Z is undervalued.
• E) stock X is overvalued, stock Y is overvalued, stock Z is undervalued.

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Definitions:

Disclose

The action of making information known or public, especially after being secret or private.

Family of Origin

relates to the family unit in which one was born or brought up, often influencing one's behavior and attitudes.

Overlook Differences

To ignore or disregard variations or disparities among individuals or situations, often to maintain harmony or focus on similarities.

Protect

refers to actions taken to ensure the safety or integrity of something or someone, preventing harm or damage.