# An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

## Question:

An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 7%, the expected return on the first factor (r{eq}_{1} {/eq}) is 11%, and the expected return on the second factor (r{eq}_{2} {/eq}) is 8%.

If bi{eq}_{1} {/eq} = 0.6 and bi{eq}_{2} {/eq} = 0.8, what is Crisp's required return? Round answer to two decimal places.

## Arbitrage Pricing Theory:

The arbitrage pricing theory (APT) model refers to a model used to compute the required rate of return of a security. This model provides the required rate using a return from different factors of the economy like GDP, market return, and many more. It indicates the sensitivity of the asset's return to the changes in the macroeconomic variables.

## Answer and Explanation:

Computation of required return using a two-factor APT model:

{eq}\begin{align*}\text{Required Return}\left ( R_j \right )&=R_f+\beta_1\left ( E_{r1}-R_f \right )+\beta_2\left ( E_{r2}-R_f \right )\\&=7\%+0.6\left ( 11\%-7\% \right )+0.8\left ( 8\%-7\% \right )\\&=10.2\%\end{align*} {/eq}

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from Financial Accounting: Help and Review

Chapter 1 / Lesson 29