6.6. How much should be invested in each of the stocks in exercise 6.3 to design two portfolios? The first portfolio has the following attributes:

factor 1 beta
1 factor 2 beta
0 The second portfolio has the attributes:

factor 1 beta
0 factor 2 beta
1 Compute the expected returns of these two portfolios. Then compute the risk premiums of these two portfolios assuming the risk-free rate is var( ˜ A)
.01 var( ˜ B)
0.4 var( ˜ C)
.02,

˜ rC
.07  5˜F1  1˜F2  ˜ C

˜ rB
.15  2˜F1  2˜F2  ˜ B

˜ rA
.13  6˜F1  4˜F2  ˜ A the “zero-beta rate” implied by the factor equations for the three stocks in exercise 6.3. This is the expected return of a portfolio with factor betas of zero.