If his portfolio currently has a sensitivity to the first factor of bi1= -0.5, what is its sensitivity to unexpected inflation? If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bi1= 0) what will its sensitivity to the first factor become
If his portfolio currently has a sensitivity to the first factor of bi1= -0.5, what is its sensitivity to unexpected inflation? If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bi1= 0) what will its sensitivity to the first factor become
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Your Company, manager of the Gigantic Mutual Fund, knows that her fund currently is well diversified and that it has a CAPM beta of 1.0 The risk-free rate is 8% and the CAPM risk premium of 6.2%. She has been learning about measures of risk and knows that there are (at least) two factors: changes in industrial production index, δ1 and unexpected inflation, δ2 The APT equation is
E(Ri) – Rf = [δ1 – Rf]bi1 + [δ2 – Rf]bi2,
E(Ri) = 0.08 + [0.05]bi1 + [0.11]bi2.
Required
- If his portfolio currently has a sensitivity to the first factor of bi1= -0.5, what is its sensitivity to unexpected inflation?
- If she rebalances her portfolio to keep the same expected return but reduce her exposure to inflation to zero (i.e., bi1= 0) what will its sensitivity to the first factor become?
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