CFA Practice Question

There are 119 practice questions for this study session.

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:

RX = 0.09 - 1.5FINFL + 2FGDP + εX

RY = 0.10 + 2.5FINFL + 3.8FGDP + εY

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.

User Contributed Comments 0

You need to log in first to add your comment.