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Problem 11. (12 points) Suppose the world is described by a two factor APT model, that there are no arbitrage opportunities, and that the returns
Problem 11. (12 points) Suppose the world is described by a two factor APT model, that there are no arbitrage opportunities, and that the returns on three base assets satisfy the equations below Ti = 0.13 +2F: + 2F. + e, T2 = 0.07 + F + ez 13 = 0.11 - 2F - 2F,+ es (a) What is the risk-free rate? (4 points) (b) What is the Pure Factor portfolio for the first factor (PF1)? I.e., provide the three portfolio weights. (4 points) (c) What is the excess return/liquidity premium on the PF1? (4 points) Problem 11. (12 points) Suppose the world is described by a two factor APT model, that there are no arbitrage opportunities, and that the returns on three base assets satisfy the equations below Ti = 0.13 +2F: + 2F. + e, T2 = 0.07 + F + ez 13 = 0.11 - 2F - 2F,+ es (a) What is the risk-free rate? (4 points) (b) What is the Pure Factor portfolio for the first factor (PF1)? I.e., provide the three portfolio weights. (4 points) (c) What is the excess return/liquidity premium on the PF1? (4 points)
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