6.Consider the following simplified APT model

Factor

Expected Risk Premium

Market 6.4%

Interest rate -6%

Yield spread 9.6%

Factor Risk Exposures, sequantially for market, interest rate and yield spread

stock: P 1.0, -2.0, -0.2

P2 1.2, 0, 0.3

P3 0.3, 0.5, 1

a.Calculate the expected return for the following stocks. Assume Rf = 2 percent

b.Consider a portfolio with equal investments in stocks P, P2, and P3.

i.What are the factor risk exposures for the portfolio? -'

ii.What is the portfolio's expected return?