Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 9% Factor Inflation Industrial production Oil prices Factor Inflation Industrial production Oil prices Factor Beta 1.0 0.5 0.2 Required: a. If T-bills currently offer a 8% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. b. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. a. Expected rate of return b. Expected rate of return Expected Value 8% 4 2 10 8 Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place. % % Actual Value 8% 10 0

Consider the following multifactor (APT) model of security returns for a particular stock. Required: a. If T-bills currently offer a 8% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. b. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place