As the manager of a large broadly diversified portfolio of stocks and bonds, you realize that changes in certain macroeconomic variables may directly affect the performance of your portfolio. You are considering using an arbitrage pricing theory (APT) approach to strategic portfolio planning and want to analyze the possible impacts of the following four factors:
1) Industrial production
2) Inflation
3) Risk premia or quality spreads
4) Yield curve shifts
Indicate how each of these four factors influences the cash flows and/or the discount rates in the traditional discounted cash flow model. Explain how unanticipated changes in each of these four factors could affect portfolio returns.