Consider a three-factor APT model. The
factors and associated risk premiums are:
Change in GNP 5%
Change in energy prices -1
in long-term interest rates +2
Calculate expected rates of return
on the following stocks. The risk-free interest rate is 7%.
a. A stock whose return is
uncorrelated with all three factors.
stock with average exposure to each factor (i.e., with b = 1 for each).
pure-play energy stock with high exposure to the energy factor (b = 2) but zero
expo- sure to the other two factors.
d. An aluminum company stock with
average sensitivity to changes in interest rates and GNP, but negative exposure
of b = -1.5 to the energy factor. (The aluminum company is energy-intensive and
suffers when energy prices rise.)