18. APT (S8.4) The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors:

Investment b1 b2 X 1.75 0.25 Y −1.00 2.00 Z 2.00 1.00 We assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills obviously offer zero risk premium.

a. According to the APT, what is the risk premium on each of the three stocks?