1.A portfolio manager at a small hedge fund uses a two-factor model, based on gross domestic
product (GDP) and the level of housing prices (HP), to forecast the return of assets in the
portfolio over a 1-year horizon. The manager estimates that a factor portfolio for the GDP factor
has an expected return of 11% and a factor portfolio for the HP factors has an expected return of
7%. Assuming a risk-free rate of 3.5% and using this model, what would be the expected return
of an asset with a GDP factor beta of 0.7 and an HP factor beta of 1.5?
A. 10.5%
B. 14.0%
C. 18.2%
D. 21.7%