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Question 4 Mr. A owns a portfolio with the following characteristics Security X Security Y Risk Free security Factor 1 sensitivity 0.70 1.40 0 Factor 2 sensitivity 0.80 1.60 0 Expected Return 14% 18% 9% It is assumed that security returns are generated by a two factor model. i. If Mr. A has 1,20,000 to invest and sells short 40,000 of security Y and purchases 1,60,000 of security X what is the sensitivity of Mr. A's portfolio to the two factors? ii. If Mr. A borrows 60000 at the risk free rate and invests the amount he borrows along with the original amount of 1,20,000 in security X and Y in the same proportion as described in part (i), what is the sensitivity of the portfolio to the two factors ? iii. What is the expected risk premium of factor 2? Question 4 Mr. A owns a portfolio with the following characteristics Security X Security Y Risk Free security Factor 1 sensitivity 0.70 1.40 0 Factor 2 sensitivity 0.80 1.60 0 Expected Return 14% 18% 9% It is assumed that security returns are generated by a two factor model. i. If Mr. A has 1,20,000 to invest and sells short 40,000 of security Y and purchases 1,60,000 of security X what is the sensitivity of Mr. A's portfolio to the two factors? ii. If Mr. A borrows 60000 at the risk free rate and invests the amount he borrows along with the original amount of 1,20,000 in security X and Y in the same proportion as described in part (i), what is the sensitivity of the portfolio to the two factors ? iii. What is the expected risk premium of factor 2