Reference no: EM133056804

You recently graduated and got a job at J, J&J investment, on your first day at work you were given the task of estimating the expected returns for 3 portfolios, AAT, STT and TTF. Based on your analysis, there are 3 risk factors that could potentially affect the excess returns, these are; market portfolio (MKT) and two variables capturing the macroeconomic exposures (MACRO1 and MACRO2). These values are: 

MKT = 7.5%, 

MACRO1= -0.3%

MARCRO2 = 0.6%

You have also estimated the following factor betas (loading factors) for all the three stocks

Portfolio	Market	MARCO1	MACRO2
AAT	1.24	-0.42	0.00
STT	0.91	0.54	0.23
TTF	1.03	-0.09	0.00

Assume a risk free rate of 4.5%

Required

1. Calculate the expected return for all three portfolios.
2. Discuss the difference between the return estimates for the single factor model and those from the multiple model. Which estimates are more likely to be useful in practice?
3. What sort of exposure does MACRO2 represent? Looking at the factor betas of MACRO2, is it reasonable to consider it a common risk factor?