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

question 35

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. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are

• A) $53.55, $54.4, $55.25
• B) $45.35, $54.4, $55.25
• C) $55.55, $56.35, $57.15
• D) $50, $50, $50
• E) $51.35, $47.79, $51.58.

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