Consider a three-factor APT model. The factors and associated risk premiums are Factor Risk Premium Change in GNP 5%

Change in energy prices 1 Change in long-term interest rates 2 Calculate expected rates of return on the following stocks. The risk-free interest rate is 7%.

a. A stock whose return is uncorrelated with all three factors.

b. A stock with average exposure to each factor (i.e., with b  1 for each).

c. A pure-play energy stock with high exposure to the energy factor ( b  2) but zero exposure to the other two factors.

d. An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b   1.5 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.)

INTERMEDIATE AppendixLO1