The T-bills rate is 6%. (a) Consider the following factors in the market: Factor Factor beta Factor expected return Interest rate (IR) 1.2 10% GDP 0.5 8% Inflation (1) 1.4 11% Suppose portfolio A is a well-diversified portfolio, and APT is valid in the market. Compute the expected rate of return on portfolio A. (b) Consider a multifactor model of the excess return on stock i: Ri= 10% +1.11 R +0.6GDP + 1.21 +e; The factor expected rate of returns are the same as in the part (a). Compute the expected rate of return on this stock using the no-arbitrage equation of APT. Is the stock overpriced or underpriced? Explain. (c) Suppose now, the APT is valid in the market with two factors, Fi and F2. The fol- lowing information is about two well-diversified portfolios B and C: Securities Expected return B on F B on F B 19.9% 1.5 0.8 18.1% 0.5 1.2 Assume no arbitrage in the market. Compute the risk premium on F and F2, respectively. The T-bills rate is 6%. (a) Consider the following factors in the market: Factor Factor beta Factor expected return Interest rate (IR) 1.2 10% GDP 0.5 8% Inflation (1) 1.4 11% Suppose portfolio A is a well-diversified portfolio, and APT is valid in the market. Compute the expected rate of return on portfolio A. (b) Consider a multifactor model of the excess return on stock i: Ri= 10% +1.11 R +0.6GDP + 1.21 +e; The factor expected rate of returns are the same as in the part (a). Compute the expected rate of return on this stock using the no-arbitrage equation of APT. Is the stock overpriced or underpriced? Explain. (c) Suppose now, the APT is valid in the market with two factors, Fi and F2. The fol- lowing information is about two well-diversified portfolios B and C: Securities Expected return B on F B on F B 19.9% 1.5 0.8 18.1% 0.5 1.2 Assume no arbitrage in the market. Compute the risk premium on F and F2, respectively.