Question #35
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 16
Status: Correct
Correct Answer: A
Question
The macroeconomic factor models for the returns on Omni, Inc., (OM) and Garbo Manufacturing (GAR) are: ROM = 20.0% +1.0(FGDP) + 1.4(FQS) + εOM RGAR = 15.0% +0.5(FGDP) + 0.8 (FQS) + εGAR What is the expected return on a portfolio invested 60% in Omni and 40% in Garbo?
Answer Choices:
A. 20.96%
B. 19.96%
C. 18.0%
Explanation
In the macroeconomic model, the intercept is the expected return. The expected return of
the portfolio is the weighted average of the expected return of the 2 stocks:
RP = [(0.6)(20.0%) + (0.4)(15.0%)] = 18%