$($Investment Management$)($ Economics$)($ Finance$).$

Suppose that the returns of the assets in the table below are derived by the two$-$factor model

$R_i={}_i+b_{1i}{I}_1+b_{2i}{I}_2+{}_i$

Suppose that the first factor has an expected return of $I_1=7\%$ and a standard deviation

${}_{I1}=4\%.$ The second factor has an expected return of $I_2=8\%$ and a standard deviation of

${}_{I2}=6\%.$ The returns between the two factors and the returns between the idiosyncratic

component of each asset and each factor are uncorrelated. The risk$-$free rate of return is $R_F=$

$2\%.$

a$.$ Compute the expected returns and the variance$-$covariance matrix for these five assets.

b$.$ Rank these five assets according to the Sharpe ratio from the most to the least desirable.

c$.$ Which asset$($s$)$ are underpriced? Which asset$($s$)$ are overpriced?$|$