Consider a two-factor economy. The risk free rate is 3%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free. Factor 1 sensitivity Factor 2 Sensitivity Return 1.0 0.5 Asset 14% 19% 0.5 (1) What are the risk premiums of factor portfolio 1 and 2? (15 marks) (2) A well-diversified risky asset has B1 2 and 21. What is its arbitrage-free expected return? (10 marks) (3) If the forecasted return of asset in (2) is 22%, indicate an arbitrage transaction that could be used to profit from this pricing situation. (15 marks)