HW Ch 8

Consider the following simplified APT model:

Factor	Expected Risk Premium
Market	6.4	%
Interest rate	.6
Yield spread	5.1

Use the following information for stocks. Assume r_f = 5%.

	Factor Risk Exposures
	Market	Interest Rate	Yield Spread
Stock	(b1)	(b2)	(b3)
P	1.0	2.0	.2
P2	1.2	0	.3
P3	.3	.5	1.0

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

a.	What are the factor risk exposures for the portfolio? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Factor Risk Exposures
Market(b1)
Interest rate(b2)
Yield spread(b3)

b.	What is the portfolios expected return? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Expected return

%