Question 2 /25/

You recently graduated and got a job at J, J&J investment, on your first day at work you were given the task of estimating the expected returns for 3 portfolios, AAT, STT and TTF. Based on your analysis, there are 3 risk factors that could potentially affect the excess returns, these are; market portfolio (MKT) and two variables capturing the macroeconomic exposures (MACRO1 and MACRO2). These values are:

MKT = 7.5%,

MACRO1= -0.3%

MARCRO2 = 0.6%

You have also estimated the following factor betas (loading factors) for all the three stocks

Portfolio	Market	MARCO1	MACRO2
AAT	1.24	-0.42	0.00
STT	0.91	0.54	0.23
TTF	1.03	-0.09	0.00

Assume a risk free rate of 4.5%

Required

1. Calculate the expected return for all three portfolios./9/
2. Discuss the difference between the return estimates for the single factor model and those from the multiple model. Which estimates are more likely to be useful in practice? /12/
3. What sort of exposure does MACRO2 represent? Looking at the factor betas of MACRO2, is it reasonable to consider it a common risk factor? /4/