Q7.

A one-factor APT model explains returns in the economy in this question. Suppose the returns to investments in mint-ice-cream production (my favourite ice cream flavour) explain returns in this economy. The risk-free rate is constant over these 3 years at 7% per year. You observe the following annual returns:

Year	Mint ice-cream returns	Pet Rock Manufacturing
1	9%	13.8%
2	16%	34.1%
3	15%	31.2%

What is the alpha of Pet Rock Manufacturing? Assume that the alpha, beta and the risk-free rate are constant over these three years and that there is no firm-specific return other than alpha. Please choose the answer that is closest to the correct answer.

Group of answer choices

2%

0%

3%

1%