Ms. Bethel, manager of the Humongous Mutual Fund, knows that her fund currently is well diversified and

Question:

Ms. Bethel, manager of the Humongous Mutual Fund, knows that her fund currently is well diversified and that it has a CAPM beta of 1.0. The risk-free rate is 8% and the CAPM risk premium, [E(Rm) - Rf], is 6.2%. She has been learning about measures of risk and knows that there are (at least) two factors: changes in industrial production index, Î´1, and unexpected inflation. Î´2. The APT equation is

EIR) – R; = [5,- R, b, + :- R b: E(1 E(R) = .08+[.05b;+1b2.

(a) If her portfolio currently has a sensitivity to the first factor of bp1 = -.5, what is its sensitivity to unexpected inflation?
(b) If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bp2 = 0), what will its sensitivity to the first factor become?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...