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1. Consider a three-factor APT model. The factors and associated risk premiums are Factor Risk Premium (%) Change in GNP 6 Change in energy prices

1. Consider a three-factor APT model. The factors and associated risk premiums are Factor Risk Premium (%) Change in GNP 6 Change in energy prices -0.05 Change in long-term Interest rates 2.5 Calculate expected rates of return on the following stocks. The risk-free interest rate is 4%. a) A stock whose return is uncorrelated with all three factors b) A stock with average exposure to each factor. c) A stock with high exposure to the energy factor (beta=2) but zero exposure to the other two factors.

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