Consider an economy where the market can be described by three sources of systematic risk (F₁, F₂, and F₃) with associated risk premiums RP₁= 5%, RP₂= 2%, and RP₃= 4%. The return on stock ABC is generated according to the following equation:

r_ABC=0.13+1.0F₁+0.5F₂+0.75F₃+e_ABC

Assume that the stock is currently priced at $50 per share and T-bill rate is 5%.

1.What is the equilibrium rate of return for stock ABC using the APT?

2.Is stock ABC underpriced or overvalued? Explain

3.If the expected price next year will be $56, what is the stock price now that will not allow for arbitrage profits?

4.Assume that the T-bill rate decreases to 3%, with the other variables remaining unchanged.Would you recommend to buy or sell stock ABC?