Consider the three factor APT model Factor Risk Premium Change in GNP 5% Change in energy prices -1 Change in long-term interest rates +2 Calculate the expected rate of return on the following stocks....

Consider the three factor APT model

Factor                                                          Risk Premium

Change in GNP                                            5%

Change in energy prices                              -1

Change in long-term interest rates             +2

Calculate the expected rate of return on the following stocks. The risk free interest rate is 7%.

a. A stock whose return is uncorrelated with all three factors

b. A stock with average exposure to each factor (i.e., with b = 1 for each)

c. A pure play energy stock with high exposure to the energy factor (b=2) but zero exposure to the other two factors