EXERCISE #2: One-factor APT. The risk-free rate is 6%. Here is the info on two stocks.

Stock	Price	Div 1	g	Expected Return	Beta
X	$43.90	$4.39	5%	15%	1.15
Y	$68.89	$6.20	2%	11%	0.7

The exp return is backed out of the Corp Finan formula for the price of a stock with a constant dividend growth rate: P0 = D1 / (E[r] g). a.) Compute the expected return on the market implied in the Stock X expected return APT: E[rX] = rf + B (E[rM] rf) E[rM] = ................................% b.) Using the computed exp return on the market, Stock Ys expected return should be APT: E[rY] = rf + B (E[rM] rf) E[rY] ...................................%

c.) Comparing the exp return of 11% on Stock Y implied in its price to the computed exp return on Stock Y, we conclude that d.) To construct an arbitrage portfolio, we should buy stock..........and short stock.......(or there is no arbitrage, stocks are correctly priced)