Consider a three-factor APT model (Fama-French). The factors and associated risk premiums are the following:

FACTORS	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 shares. The risk-free rate is 7%.

a) A share the return of which is uncorrelated with all three risk factors.

b) A share with average exposure to each factor, i.e., with = 1 for each. (Hint: Beta is a measure of correlation).

c) A pure-play (focused on this sector only) energy company share with high exposure to energy factor ( = 2) but zero exposure to the other factors.

d) An aluminium company share with average sensitivity to changes in interest rates and GNP but negative exposure of -1.5 to the energy factor.