CAS Exam 9 Spring 2019, Question 5
Study guide: Exam 9
Consider the following multifactor APT model for a particular firm:
| Economic Factor | Factor Loadings | Risk Premium |
|---|---|---|
| Alternative Markets | 0.4 | 8.0% |
| Job Growth | 1.2 | 6.0% |
| Inflation | -0.3 | 1.5% |
- A data breach at the firm results in a firm-specific component of -10%
- Factor loadings and risk premiums do not change after the data breach
- The risk-free rate is 3%
Part a (1 point)
Calculate the expected rate of return for the firm before and after the data breach.
Part b (0.5 points)
Briefly describe one advantage and one disadvantage of using a model based on APT instead of CAPM.
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