1.

Suppose that two factors have been identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3.9%, and IR 3.6%. A stock with a beta of 1.1 on IP and .5 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 5%, while the inflation rate turns out to be 3%, what is the actual rate of return on the stock?

2.

Consider the multi-factor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 8%, respectively. Stock A has a beta of 1.5 on factor 1, and a beta of 1.2 on factor 2. The expected return on stock A is 22%. If no arbitrage opportunities exist, then what is the risk-free rate?

Round your answer to 4 decimal places. For example, if your answer is 3.205%, then please write down 0.0321.