Explanation:
In a macroeconomic factor model, the expected return is given by the constant term (intercept) in the equation, since the factors and represent surprises with expected value of zero.
For Stock X: Expected return = 8% (0.08) For Stock Y: Expected return = 16% (0.16)
Portfolio weights:
Portfolio expected return:
Therefore, the portfolio's expected return is 14%.
Ultimate access to all questions.
The returns of stocks X and Y are given by a macroeconomic factor model and expressed as follows:
where and reflect surprises in two macroeconomic factors. If a portfolio has one quarter of its investment in Stock X and the rest in Stock Y, the portfolio's expected return is closest to:
A
12%
B
14%
C
18%
No comments yet.