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Lake Allure Properties, a developer, owns three stocks: ABC Mortgage, BCD Appliance Manufacturing, and CDE Consumer Products Company. Lake Allure uses Arbitrage Pricing Theory to analyze its investments. It has identified three risk factors that its holdings are subject to: interest rate changes, inflation, and changes in Real GNP. It has assigned the following estimated risk premiums to each of the three factors:
Lake Allure has also determined that each of its three stocks has the following factor risk exposures (betas):
What is the expected return for ABC Mortgage if the risk-free rate is 3%?A. 7.85% B. 16.85% C. 21.15% D. 13.45% |