Assume that there are two factors that price assets. Interest rate rf = 3%. You have the following information about two well-diversified arbitrage-free risky assets. Asset one: E(r) = 12% Beta1 = 1.5 Beta2 = 2 Asset two: E(r) = 8% Beta1 = 1 Beta2 = 1

A)Calculate the risk premium of two risk factors. (b) There is a third well-diversified portfolio with 1 = 2 and 2 = 0.5. What is this portfolios arbitrage free expected return? (c) Suppose the forecasted return of the portfolio in the previous question is 10%. Show how you could construct an arbitrage portfolio.