Based on the information in Exhibit 1, the expected return for Portfolio 1 is closest to:

2.58%.

3.42%.

6.00%

When using a macroeconomic factor model, the expected return is the intercept (when all model factors take on a value of zero). The intercept coefficient for Portfolio 1 in Exhibit 1 is 2.58.

The outcome of the macroeconomic factor formula is the expected return of a portfolio adjusted for macro factors surprises. When all these factors as expected , then macroeconomic factor model adjust for nothing, thus the expected return ( adjusted by the macroeconomic factor model) is the intercept (the expected return).

The “expected” return is what you get if the factors are what was predicted.

Ona simple model.

Return = 2% + Factor(GDP) x GDP surprise.
Factor*GDP) = 1.5

GDP predicted to be 3%, GDP turns out to be 3%.
Return = 2% + 1.2 x (0) = 2%

if GDP was 5%
Return = 2% + 1.2 x (5% - 3%) = 4.4%

So you expectation is the GDP will be as predicted so expected return = intercept as you are not expectng surprises. If was expected it would be be a surprise.