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For Question 4 Please complete the parts with all steps needed. These are practice questions and I need help solving it. 4. Consider the two-factor
For Question 4 Please complete the parts with all steps needed. These are practice questions and I need help solving it.
4. Consider the two-factor model: ri=rf+1,iF1+2,iF2+i, where F1 and F2 are macroeconomic risk factors, and i is an idiosyncratic shock that is i.i.d, with mean zero. The following data is collected for four assets: (a) Use assets A and B to derive the factor loadings consistent with the model above. (b) Use the factor loadings to calculate the arbitrage-free value of 1,C. (c) Suppose now that 1,C=0.5. If so, what is the value of C that is consistent with the data? (d) Let 1,C=0.5 and suppose that C=0.12 and all other data are as in the table. Set up a beta-hedged portfolio that replicates the macro-risks in asset C. Carefully explain how you can gain from trading the assets. 4. Consider the two-factor model: ri=rf+1,iF1+2,iF2+i, where F1 and F2 are macroeconomic risk factors, and i is an idiosyncratic shock that is i.i.d, with mean zero. The following data is collected for four assets: (a) Use assets A and B to derive the factor loadings consistent with the model above. (b) Use the factor loadings to calculate the arbitrage-free value of 1,C. (c) Suppose now that 1,C=0.5. If so, what is the value of C that is consistent with the data? (d) Let 1,C=0.5 and suppose that C=0.12 and all other data are as in the table. Set up a beta-hedged portfolio that replicates the macro-risks in asset C. Carefully explain how you can gain from trading the assets Step by Step Solution
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