Stephen Ross, the chief economist at Arbitrage Asset Management Group, uses the multiple factor model to help explain mispriced securities. He identifies two sources of systematic risk. The systematic risks and associated risk premiums are shown in the following table Systematic factor Industrial production, IP Credit risk, CRED Risk premium 5% 3% Currently, Ross holds two stocks A and B Forecasted Sensitivity to Sensitivity to Stock A Stock B T-bill return 92% 12% 4% IP 0.5 CRED 1.2 0.3 Describe a well-diversified portfolio as the form of the expected return-beta relationship. Hint: assume that any well-diversified portfolio has zero alpha.] Find the equilibrium expected return on each stock using the above relationship. Are those stocks overpriced or underpriced? Explain why. a) b)