Consider the following multifactor (APT) model of security returns for a particular stock.

Factor	Factor Beta	Factor Risk Premium
Inflation	1.1	6%
Industrial production	0.5	8
Oil prices	0.3	3

a) If T-bills currently offer a 5% yield, find the expected rate of return on this stock if the market views the stock as fairly priced.

b) Suppose that the market expected the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the surprises become known.

Factor	Expected Rate of Change	Actual Rate of Change
Inflation	6%	3%
Industrial production	4	7
Oil prices	2	-1