6 Question 8 Suppose that the following two-factor model describes returns: ni = 4:+bafi +2/2+ Moreover, the information in the table below is provided for a financial market in which stock returns respond to two factors Stock bab2 Expected rate of return for stock X 1 0.5 12.0% Y 3 0.2 13.4% Z 3 -0.5 12.0% where bi and ba for i = X, Y, Z denote the responses of the rates of return on stock X, Y and Z to the factors. Assume that there is a risk-free asset available. Determine the arbitrage pricing theory (APT) equation 6 Question 8 Suppose that the following two-factor model describes returns: ni = 4:+bafi +2/2+ Moreover, the information in the table below is provided for a financial market in which stock returns respond to two factors Stock bab2 Expected rate of return for stock X 1 0.5 12.0% Y 3 0.2 13.4% Z 3 -0.5 12.0% where bi and ba for i = X, Y, Z denote the responses of the rates of return on stock X, Y and Z to the factors. Assume that there is a risk-free asset available. Determine the arbitrage pricing theory (APT) equation