Suppose that a well-diversified portfolio has an expected return of 11% and that the following tw...

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Question

Suppose that a well-diversified portfolio has an expected return of 11% and that the following two factors have an impact cha

business finance

Answer 1

Answer #1

(i)

Sensitivity to GDP or $61$ is equal to -1.25. Substituting this value in the given equation we get

$0.11=0.05+(-1.25)(0.035)+\beta_2(0.0825)$

or $\beta_2=1.26$

(ii)

If exposure to inflation is reduced to zero, $\beta_2$ is zero. Substituting this value in the given equation we get

$0.11=0.05+\beta_1(0.035)$

or $\beta_1=1.71$

Answer 2

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