2. Consider a two-factor economy. The riskfree rate is 2%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free. Asset Factor 1 sensitivity Factor 2 Sensitivity Return A 1.0 0.5 12% B 0.5 1.0 16% (1) What are the risk premiums of factor portfolio 1 and 2? (15 marks) (2) A well-diversified risky asset has B1 = 1.2 and B2 = 0.8. What is its arbitrage-free expected return? (10 marks) (3) If the forecasted return of asset in (2) is 18%. Indicate an arbitrage transaction that could be used to profit from this pricing situation. (15 marks)