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( b 1) (...

1. Consider the following simplified APT model:

Required:

1. 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

2.What are the factor risk exposures for the portfolio?

3.What is the portfolio’s expected return?