Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λ₀) = .025 and the risk premiums for the two factors are (λ₁) = .12 and (λ₀) = .10.
$\begin{array}{ccc}\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \\\hline \text { A } & -0.25 & 1.1 \\\text { B } & -0.05 & 0.9 \\\text { C } & 0.01 & 0.6\end{array}$
-Refer to Exhibit 7-9. Assume that stocks A, B, and C never pay dividends and stocks A, B, and C are currently trading at $10, $20, and $30, respectively. What is the expected price next year for each stock? $\begin{array}{lccc} & A & B & C \\\hline \text { I. } & \$ 10.82 & \$ 21.82 & \$ 30.99 \\\text { II. } & \$ 11.05 & \$ 22.18 & \$ 30.96 \\\text { III. } & \$ 11.32 & \$ 22.56 & \$ 30.99 \\\text { IV. } & \$ 11.65 & \$ 22.42 & \$ 30.96 \\\text { V. } & \$ 18.50 & \$ 37.00 & \$ 48.30\end{array}$

A) I
B) II
C) III
D) IV
E) V

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