All the information is provided in the question. Consider the following two$-$factor model for the

returns of three stocks. Assume that the factors and

epsilons have means of zero. Also, assume the

factors have variances of $\mathrm{.}01$ and are uncorrelated

with each other.

tilde$(r{)}_A=\mathrm{.}13+6$tilde$(F{)}_1+4$tilde$(F{)}_2+$tilde$(lon{)}_A$

tilde$(r{)}_B=\mathrm{.}15+2$tilde$(F{)}_1+2$tilde$(F{)}_2+$tilde$(lon{)}_B$

tilde$(r{)}_C=\mathrm{.}07+5$tilde$(F{)}_1-1$tilde$(F{)}_2+$tilde$(lon{)}_C$

How much should be invested in each of the stocks

to design two portfolios? The first

portfolio has the following attributes:

factor $1$ beta $=1$

factor $2$ beta $=0$

The second portfolio has the attributes:

factor $1$ beta $=0$

factor $2$ beta $=1$

Compute the expected returns of these two

portfolios. Then compute the risk premiums of

these two portfolios assuming the risk$-$free rate is

the "zero$-$beta rate" implied by the factor equations

for the three stocks. This is the

expected return of a portfolio with factor betas of

zero.