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Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium (%) Change in gross national product (GNP) +6.8 Change in

Consider a three-factor APT model. The factors and associated risk premiums are:

Factor Risk Premium (%)
Change in gross national product (GNP) +6.8
Change in energy prices 0.9
Change in long-term interest rates +3.5

Calculate expected rates of return on the following stocks. The risk-free interest rate is 4.2%.

  1. A stock whose return is uncorrelated with all three factors. (Enter your answer as a percent rounded to 1 decimal place.)

  2. A stock with average exposure to each factor (i.e., with b = 1 for each). (Enter your answer as a percent rounded to 1 decimal place.)

  3. A pure-play energy stock with high exposure to the energy factor (b = 2.5) but zero exposure to the other two factors. (Enter your answer as a percent rounded to 2 decimal places.)

  4. An aluminum company stock with average sensitivity to changes in interest rates and GNP, but negative exposure of b = 1.4 to the energy factor. (The aluminum company is energy-intensive and suffers when energy prices rise.) (Enter your answer as a percent rounded to 2 decimal places.)

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