Question: Consider a three-factor APT model. The factors and associated risk premiums are: Factor Risk Premium Change in GNP 5.2% Change in energy prices -1.8% Change

Consider a three-factor APT model. The factors and associated risk premiums are:

Factor Risk Premium

Change in GNP 5.2%

Change in energy prices -1.8%

Change in long-term interest rates 1.7%

An aluminum company stock has average sensitivity to changes in interest rates and GNP, but negative exposure of b2 = -1.8 to the energy factor. Calculate the company's expected return. The risk-free rate is 3.8%.

  1. 7.46%
  2. 7.04%
  3. 10.14%
  4. 13.94%
  5. 17.74%

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