Consider the following simplified APT model:

Factor Expected Risk Premium

Market 8.3%

Interest Rate -0.3

Yield Spread 5.4

Use the following information for stocks. Assume rf = 6%.

Stock Market (b1) Factor Risk Exposures Interest Rate (b2) Yield Spread (b3)

P 1.9 -1.2 -0.7

p^2 1.1 0 0.5

p^3 0.3 1.1 1.0

Consider a portfolio with equal investments in stocks p, p^2, and p^3.

a.) What are the factor risk exposures for the portfolio?

b.) what is the portfolio's expected return?