Question: Use the APT model to predict the return next year of a stock with two factors: (1) the change over the last year in the

Use the APT model to predict the return next year of a stock with two factors: (1) the change over the last year in the inflation rate, in percentage points; and (2) the spread between ten-year Treasury bonds and three-month Treasury bills, in percentage points. Suppose the average risk-free interest rate is 1 percent. The stock has a beta on the change in the inflation rate of -2 and a beta on the spread of 5, if you expect the inflation rate to rise 1 percentage point and you think the spread will be 3 percentage points. What is the expected return to this stock?

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