Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 8.0 Interest rate −.6...

Consider the following simplified APT model:

Factor	Expected Risk Premium (%)
Market	8.0
Interest rate	−.6
Yield spread	5.1

	Factor Risk Exposures
	Market	Interest Rate	Yield Spread
Stock	(b₁)	(b₂)	(b₃)
P	1.6	–1.1	–.4
P²	1.6	0	.7
P³	.3	.7	1.0

Consider a portfolio with equal investments in stocks P, P², and P³. Assume r_f = 5%.

a. What are the factor risk exposures for the portfolio? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places.)

	Factor Risk Exposures
Market (b₁)
Interest rate (b₂)
Yield spread (b₃)

b. What is the portfolio’s expected return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Expected return %

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Expert Solution

jeff jeffy answered 1 year ago

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