Look again at Problem 19. Consider the following simplified APT model:

Factor                      Expected Risk Premium

Market ..................................6.4%

Interest rate ............................6

Yield spread .........................5.1

Calculate the expected return for the following stocks. Assume rf = 5%.

Consider a portfolio with equal investments in stocks P, P2 and P3.
a. What are the factor risk exposures for the portfolio?
b. What is the portfolio's expected return?

Factor Risk Exposures Market (b4) 1.0 1.2 Interest Rate (b2) 2.0 Yield Spread (b3) .2 .3 1.0 Stock p2 p3 .5