Factor Models A portfolio manager wants to create a simple portfolio from only two stocks, A and B.

The returns for stocks A and B are given by the following equations:

R A = 0.09 − 1 F INF  + 1 F GDP  +  ε A and R B = 0.12 − 2 F INF  + 4 F GDP  +  ε B The manager forms a portfolio with market value weights of 40 per cent in stock A and 60 per cent in stock B. What is the sensitivity to the portfolio of a 1 per cent rise in inflation, in basis points?