- CFA Exams
- CFA Level I Exam
- Study Session 16. Portfolio Management (1)
- Reading 44. Using Multifactor Models
- Subject 2. Factors and types of multifactor models

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**CFA Practice Question**

A portfolio manager plans to create a portfolio from two stocks, Stock X and Stock Y. The following equations describe the returns for those stocks:

B. 1%

C. 1.5%

R

_{X}= 0.09 - 1.5F_{INFL}+ 2F_{GDP}+ ε_{X}R

_{Y}= 0.10 + 2.5F_{INFL}+ 3.8F_{GDP}+ ε_{Y}You form a portfolio with market value weights of 50 percent X and 50 percent Y. Calculate the sensitivity of the portfolio to a 1% surprise in inflation.

A. 0.5%

B. 1%

C. 1.5%

Correct Answer: A

Portfolio inflation sensitivity is the weight on stock X multiplied by its inflation sensitivity, plus the weight on stock Y multiplied by its inflation sensitivity: 0.5(-1.5) + 0.5(2.5) = 0.5 So a 1 percent interest rate surprise increase in inflation is expected to produce a 50 basis point increase in the portfolio's return.

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