Question
It is believed that three assets, Asset 1, Asset 2 and Asset 3, are following two-factor model. The model parameters are estimated as follow, Asset
It is believed that three assets, Asset 1, Asset 2 and Asset 3, are following two-factor model. The model parameters are estimated as follow,
| Asset | i | 1i | 2i |
| 1 | 0.05 | 1 | 3 |
| 2 | 0.07 | 2 | 1.5 |
| 3 | 0.09 | 3 | 3 |
Assume E[f]=e1=e2=e3=0.
(a) Construct a zero-beta portfolio from these three risky assets. What are the weighting of the assets in this portfolio? [3 mark]
(b) What is the zero-beta risk premium 0? [1 mark]
(c) What is the meaning of factor risk premium in factor models? [1 mark]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Investments
Authors: Zvi Bodie, Alex Kane, Alan J. Marcus
9th Edition
73530700, 978-0073530703
