3.1 A two-factor APT model (20 points) Consider an economy where returns are described by a two-factor APT model. The interest rate is set to zero. Factors have mean zero, unit variance, and they are uncorrelated with each other. Excess return for asset i = 1, 2,..., 5 is rit = E[rit] + B,1 F1,t + i,2F2,t + i,t where i,t is uncorrelated over time and across assets. Expected returns are given by E[rit] =B,1 + B,2 2 where and are the factor risk premia. You obtain a table with the estimates of the factor loadings (betas) and expected returns for the five assets. However, there are some entries missing in the table, as can be seen below: Using the data from the table above, answer the following questions: a) Compute the factor risk premia and . b) Compute the expected return for asset 3. c) Compute the loading on factor 1 for asset 4. d) Suppose Cov(r ,t, re,t) = 1.0. Compute the factor loadings for asset 5. 3.1 A two-factor APT model (20 points) Consider an economy where returns are described by a two-factor APT model. The interest rate is set to zero. Factors have mean zero, unit variance, and they are uncorrelated with each other. Excess return for asset i = 1, 2,..., 5 is rit = E[rit] + B,1 F1,t + i,2F2,t + i,t where i,t is uncorrelated over time and across assets. Expected returns are given by E[rit] =B,1 + B,2 2 where and are the factor risk premia. You obtain a table with the estimates of the factor loadings (betas) and expected returns for the five assets. However, there are some entries missing in the table, as can be seen below: Using the data from the table above, answer the following questions: a) Compute the factor risk premia and . b) Compute the expected return for asset 3. c) Compute the loading on factor 1 for asset 4. d) Suppose Cov(r ,t, re,t) = 1.0. Compute the factor loadings for asset 5