Under arbitrage pricing theory, assume two stocks have the following equations.

K _x = 14% + 2F _1,t – 3F _2,t

K _y = 10% + 1F _1,t – 4F _2,t

The first factor relates to unexpected increases in real GDP, and the second factor relates to unexpected increases in interest rates.

If a portfolio consists of 60 percent of stock x and 40 percent of stock y, what will be the equation for portfolio return (K _p )?

Answer rating: 100% (QA)

Given K x 14 2F 1t 3F 2t K y 10 1F 1t 4F 2t Combining these two stocks into portfolio weights of 60 ... View the full answer