Question 5. (5 points) USE the information below for all 5 questions of this problem. ALL questions are independent. Assume that a three-factor APT describes the returns of all well- diversified portfolios, and that the three factors are unexpected changes in production (factor 1), a default spread factor (factor 2), and a Treasury term-spread factor (factor 3). Because of recent adverse events, over the next year, the market expects production to grow only by 1.5%, default spread to be 3.0%, and the term spread to be 1.8%. The pricing relationships for all well diversified portfolios are given by: E(ra) =0.05 +B. *0.07+ B2 *0.05 - Ba *0.04 All investors can borrow or lend at the risk free rate of 5%. Sigma(factori) = Sigma (factor2) = Sigma (factor3) = 0.15. For simplicity, assume that the coefficient of correlation between any two factors is 0. The return process for portfolio A (which is well diversified) over the next year is: ra=E(r.)+1.25 +0.5f2-0.5f. 5.a. What is the expected return portfolio A? (1 point) expected return portfolio A PLEASE REPORT YOUR ANSWER HERE 5.b. What is the standard deviation of portfolio A? (1 point) PLEASE REPORT YOUR ANSWER HERE Standard deviation of portfolio A 5.c. If production grows by 3% over the next year, the default spread falls to 2.75%, and the term spread does exactly what the market expects, what will be the return on the portfolio A? (1 point) Question 5. (5 points) USE the information below for all 5 questions of this problem. ALL questions are independent. Assume that a three-factor APT describes the returns of all well- diversified portfolios, and that the three factors are unexpected changes in production (factor 1), a default spread factor (factor 2), and a Treasury term-spread factor (factor 3). Because of recent adverse events, over the next year, the market expects production to grow only by 1.5%, default spread to be 3.0%, and the term spread to be 1.8%. The pricing relationships for all well diversified portfolios are given by: E(ra) =0.05 +B. *0.07+ B2 *0.05 - Ba *0.04 All investors can borrow or lend at the risk free rate of 5%. Sigma(factori) = Sigma (factor2) = Sigma (factor3) = 0.15. For simplicity, assume that the coefficient of correlation between any two factors is 0. The return process for portfolio A (which is well diversified) over the next year is: ra=E(r.)+1.25 +0.5f2-0.5f. 5.a. What is the expected return portfolio A? (1 point) expected return portfolio A PLEASE REPORT YOUR ANSWER HERE 5.b. What is the standard deviation of portfolio A? (1 point) PLEASE REPORT YOUR ANSWER HERE Standard deviation of portfolio A 5.c. If production grows by 3% over the next year, the default spread falls to 2.75%, and the term spread does exactly what the market expects, what will be the return on the portfolio A? (1 point)