Consider two firms: Electricity and Jewelry. Electricity is a regulated electric-power utility, and Jewelry is a well-known luxury jewelry retailer. The multifactor (APT) model of security returns for two stocks has the following information: (20 points)

Factor	Factor Beta for Electricity	Factor Beta for Jewelry	Factor Risk Premium
Inflation	0.6	0.2	5%
Real GDP	0.5	0.8	8%
Gold Price	-0.1	1.5	2%

(a) If T-bills currently offer a 5% yield, find the expected rate of return on two stocks if the market views the stocks are fairly priced. (5 points)

(b) If the expected rate of return on Electricity were 11%, would there be an arbitrage opportunity? If so, please specify the arbitrage opportunity using three factor portfolios and risk-free asset. (8 points)

(c) Jewelry firm plans to diversify the current product and enter into a new market. Then Jewelrys stock will be less sensitive to gold price changes. If beta loading on gold price factor drops to 1.0, how much will the expected return of Jewelry stock change? (7 points)