(3) (Total: 18 points) Suppose the following three-factor model holds: rit - rf= di + Bii(rit- rf) + Ba(r2t, rf) + Bi3(r31 rf) + eit, where rit is the return on security i at time t, rfis the riskfree rate, rit, r2t, and r3t are the returns on the three factor portfolios at time t, Bil, Biz, and Biz are the sensitivities of i to the factors, and eit is the impact of unanticipated firm-specific events on i. = = (a) (4 points) A well-diversified portfolio P has Bpi = 1, Bp2 = 0.5, and Bp3 = -0.3. The riskfree rate rfis 4%. The expected factor returns are given by E(r) = 5%, E(r2) = 4%, and E(r3) = 2%. Calculate P's expected return if no arbitrage opportunities exist. (b) (3 points) Will P's realized return be always equal to your answer in (a)? Briefly explain. (3) (Total: 18 points) Suppose the following three-factor model holds: rit - rf= di + Bii(rit- rf) + Ba(r2t, rf) + Bi3(r31 rf) + eit, where rit is the return on security i at time t, rfis the riskfree rate, rit, r2t, and r3t are the returns on the three factor portfolios at time t, Bil, Biz, and Biz are the sensitivities of i to the factors, and eit is the impact of unanticipated firm-specific events on i. = = (a) (4 points) A well-diversified portfolio P has Bpi = 1, Bp2 = 0.5, and Bp3 = -0.3. The riskfree rate rfis 4%. The expected factor returns are given by E(r) = 5%, E(r2) = 4%, and E(r3) = 2%. Calculate P's expected return if no arbitrage opportunities exist. (b) (3 points) Will P's realized return be always equal to your answer in (a)? Briefly explain