The stock trades on the LUSE and its operations are based in the Tokyo. Current yield on a Japan $10-$year treasury is $2\mathrm{.}5\%$ with an average excess historical annual return for LUSE stocks is $7\mathrm{.}5\%.$The average return of the stock is $1\mathrm{.}25$ times as volatile as the Corporate Zambian bonds over the last $2$ years.

i$.$ Determine the expected returns using Capital Asset Pricing Model.

$[8$ Marks$]$

ii$.$ Interpret the answer in $($ii$)$ above.

$[2$ Marks$]$

Page $2$ of $3$

b$.$ Suppose the common stock for CEC is examined on the LUSE using the Arbitrage Pricing Theory approach based on two factors. The unexpected shock in Zambia's GDP and interest rate changes. Given the following data:

$\backslash$table$[[,$Factor $1,$Factor $2],[$Factor Sensitivity,$1\mathrm{.}5,1\mathrm{.}2],[$Factor Risk Premium,$0\mathrm{.}02,0\mathrm{.}03]]$

Determine the expected returns using a two factor Arbitrage Pricing Model.

$[6$ Marks$]$

c$.$ Using the solutions in $($b$)$ and $($a$)($i$)$ above explain the differences in CAPM and APM $[4$ Marks$]$