Step 1: Differentiate the given expression.
We are given the expression for \( y \):
\[
y = \frac{1 + \tan^2 x}{1 - \tan^2 x}
\]
This is the formula for \( \tan(2x) \). Therefore, we can rewrite the expression as:
\[
y = \tan(2x)
\]
Step 2: Differentiate \( y \) with respect to \( x \).
Differentiating both sides with respect to \( x \):
\[
y' = \frac{d}{dx} \left( \tan(2x) \right)
\]
Using the chain rule, we get:
\[
y' = 2 \cdot \sec^2(2x)
\]
Step 3: Evaluate \( y' \left( \frac{\pi}{8} \right) \).
Substitute \( x = \frac{\pi}{8} \) into the derivative:
\[
y' \left( \frac{\pi}{8} \right) = 2 \cdot \sec^2\left(2 \cdot \frac{\pi}{8}\right) = 2 \cdot \sec^2\left(\frac{\pi}{4}\right)
\]
Since \( \sec\left( \frac{\pi}{4} \right) = \sqrt{2} \), we have:
\[
y' \left( \frac{\pi}{8} \right) = 2 \cdot \left( \sqrt{2} \right)^2 = 2 \cdot 2 = 4
\]