Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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
a) 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 b) What are the factor risk exposures for the portfolio?
c) What is the portfolio’s expected return?
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