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Consider the following simplified APT model: Factor Expected Risk Premium (%) Market 8.1 Interest rate .5 Yield spread 5.0 Factor Risk Exposures Market Interest Rate
Consider the following simplified APT model:
| Factor | Expected Risk Premium (%) |
| Market | 8.1 |
| Interest rate | .5 |
| Yield spread | 5.0 |
|
| |
| Factor Risk Exposures | |||
| Market | Interest Rate | Yield Spread | |
| Stock | (b1) | (b2) | (b3) |
| P | 1.7 | 1.2 | .5 |
| P2 | 1.7 | 0 | .8 |
| P3 | .3 | .8 | 1.0 |
|
| |||
Consider a portfolio with equal investments in stocks P, P2, and P3. Assume rf = 4%.
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 portfolios expected return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Expected return %
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