=4/Your portfolio has a of 1.2, the no-risk cash rate is 5.6% and the risk premium

=4/Your portfolio has a β of 1.2, the no-risk cash rate is 5.6% and the risk premium is 3%.

In this chapter you learned about the APT and were told that the two V factors are growth of GDP and unanticipated inflation. The equation for the model is: rj = 5.6% +

bj1 × 2% + bj2 × 5%. Suppose that the sensitivity of your portfolio to GDP growth is

−0.4, what is your portfolio’s sensitivity to unanticipated inflation? You believe that a recession is looming and you wish to eliminate your portfolio’s sensitivity to GDP growth but you still want to get the returns you expected. What happens to your portfolio’s sensitivity to unanticipated inflation?