(a) Consider a three-factor Arbitrage Pricing Theory (APT) model for stock XYZ. Factor Risk premium Sensitivity to each factor 4% 0.5 Change in GDP Change in interest rate Change in exchange rate 1.5% 0.8 2% 0.2 Assuming a risk-free rate of 4%, calculate the expected return of stock XYZ. (4 marks) (b) What are the assumptions of APT? What is the expected risk premium? (11 marks) (c) What are the main advantages/disadvantages of APT in comparison to the CAPM? (4 marks) (d) Discuss the joint hypothesis problem in relation to empirically testing the CAPM. (6 marks) (a) Consider a three-factor Arbitrage Pricing Theory (APT) model for stock XYZ. Factor Risk premium Sensitivity to each factor 4% 0.5 Change in GDP Change in interest rate Change in exchange rate 1.5% 0.8 2% 0.2 Assuming a risk-free rate of 4%, calculate the expected return of stock XYZ. (4 marks) (b) What are the assumptions of APT? What is the expected risk premium? (11 marks) (c) What are the main advantages/disadvantages of APT in comparison to the CAPM? (4 marks) (d) Discuss the joint hypothesis problem in relation to empirically testing the CAPM. (6 marks)