Question: A multi-factor analysis reveals that your equity portfolio has the following factor loading on the three risk factors. The risk premium (^) for these

A multi-factor analysis reveals that your equity portfolio has the following factor loading on the three risk factors. The risk premium (^) for these three factors are also presented. The risk-free rate is 5%. Factor 1. Inflation 2. Investment 3. Market (i) (ii) b (loading) (premium) -0.50 1.25 1.65 1.80 1.00 4.45 If you want to reduce the Investment risk exposure to 0.5, what will be the expected return of your portfolio? Suppose there is a portfolio with b1=1.0, b2=0, and b3=0, use this portfolio to remove Inflation risk from your equity portfolio. What is the return of the new combined portfolio?

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