23. As the manager of a large, broadly diversified portfolio of stocks and bonds, you realize that changes in certain macroeconomic variables may directly affect the performance of your portfolio. You are considering using an arbitrage pricing theory (APT) approach to strategic portfolio planning and want to analyze the possible impacts of the following four factors:

• Industrial production

• Inflation

• Risk premiums or quality spreads

• Yield curve shifts

a. Indicate how each of these four factors influences the cash flows and the discount rates in the traditional discounted cash flow valuation model. Explain how unanticipated changes in each of these four factors could affect portfolio returns.

b. You now use a constan t-proportion allocation strategy of 60% stock and 40%
bonds, which you rebalance monthly. Compare and contrast an active portfolio approach that incorporates macroeconomic factors , such as the four factors listed above, with the constant-proportion strategy currently in use .