Consider the following multifactor (APT) model of security returns for the Happy Halloween (H) Company. Factor...

Consider the following multifactor (APT) model of security returns for the Happy Halloween (H) Company.

Factor	Factor Beta	Factor Risk Premium	Expected Value	Actual Value
Interest rate	1.4	-1%	2%
GDP Growth	0.9	6%	3%
Oil Prices	0.2	2%	1%

What do the factor risk premiums imply about the actual values observed for the risk factors?

If the risk-free asset is paying a 3% return, find the expected rate of return on Happy Halloween given the above information.

Suppose the Trick or Treat (T) Company had factor betas of 0.8, 1.2 and 0.6 for interest rate, GDP growth and oil prices, respectively. If you invested 40% of your assets into Happy Halloween and 60% of your assets into Trick or Treat, what would be the expected return of the resulting portfolio. Also calculate the factor betas for this portfolio for each of the factors.

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