Do I substitute the numbers into the formula Consider a two factor economy Assume the risk free rate 3 , and the risk premiums are RP 1 10 , RP 2 8 The return on stock ABC is generated according to the following equation r ABC 08 0 55F 1 1 2F 2 e ABC Assume that the stock is currently priced at $50 per share What is the expected return for stock ABC using the APT If the expected price next year will be $55, what is the stock price now that will not allow for arbitrage profits Assume that the risk free rate increases to 4 , with the other variables remaining unchanged Would you recommend to buy or sell stock ABC

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Question: Do I substitute the numbers into the formula? Consider a two factor economy. Assume the risk-free rate = 3%, and the risk premiums are RP

Do I substitute the numbers into the formula?

Consider a two factor economy. Assume the risk-free rate = 3%, and the risk premiums are RP₁ = 10%, RP₂ = 8%. The return on stock ABC is generated according to the following equation:

r_ABC.08-0.55F₁+1.2F₂+e_ABC

Assume that the stock is currently priced at $50 per share.

What is the expected return for stock ABC using the APT? If the expected price next year will be $55, what is the stock price now that will not allow for arbitrage profits?
Assume that the risk free rate increases to 4%, with the other variables remaining unchanged. Would you recommend to buy or sell stock ABC?

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