The Arbitrage Pricing Model (APM). Suppose a three-factor APM holds and the risk-free rate is 6 percent. You are interested in two particular stocks: A and B. The returns on both stocks are related to...

The Arbitrage Pricing Model (APM). Suppose a three-factor APM holds and the risk-free rate is 6 percent. You are interested in two particular stocks: A and B. The returns on both stocks are related to factors 1 and 2 as follows:

r =0.06 + b₁
(0.09) - b₂
(0.03) + b₃
(0.04)

The sensitivity coefficients for the two stocks are given below.

Calculate the expected returns on both stocks. Which stock requires a higher return?