Question: Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield
Consider the following simplified APT model:
| Factor | Expected Risk Premium |
| Market | 6.4% |
| Interest Rate | -0.6% |
| Yield Spread | 5.1% |
| Factor Risk Exposures | |||
|
| Market | Interest Rate | Yield Spread |
| Stock | Stock(b1) | (b2) | (b3) |
| P | 1.0 | -2.0 | -0.2 |
| P2 | 1.2 | 0 | 0.3 |
| P3 | 0.3 | 0.5 | 1.0 |
- Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3
- What are the factor risk exposures for the portfolio?
- What is the portfolios expected return?
Step by Step Solution
There are 3 Steps involved in it
1 Expert Approved Answer
Step: 1 Unlock
Question Has Been Solved by an Expert!
Get step-by-step solutions from verified subject matter experts
Step: 2 Unlock
Step: 3 Unlock
Study Help