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(1)Suppose that there are two independent economic factors, F 1 and F 2 . The following are three securities: SecurityXYZ Beta on factor 11.52.21 Beta

(1)Suppose that there are two independent economic factors, F1 and F2. The following are three securities:

SecurityXYZ

Beta on factor 11.52.21

Beta on factor 22.0-0.23

Expected return0.350.270.40

A)Write down the factor models for securities X, Y, and Z.

B)Write down the factor model for a portfolio composed of W1 units of X, W2 units of Y, and W3 units of Z.

C)Construct a portfolio whose beta on factor one is 1 and whose beta on factor two is 0. What is its expected return?

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