Problem 4 (10 pts) Consider a two-factor model. There are three funds A, B, C in the market. The F1 sensitivities, F2 sensitivities, and expected returns are given as below: Funds A B Sensitivities (61) 3.0 2.0 0 Sensitivities (62) 1.5 0 3.0 Expected Returns Hi 0.3% 0.24% 0.19% (a) Create a portfolio free of both Fi and F2 risk. What is the expected return of the portfolio? (b) Suppose there are additional funds D and E Funds D E Sensitivities (61) 0.2 3.5 Sensitivities (62) 0 Expected Returns Mi 0.25% 0.3% Non-factor Risk (ci) 0.4 0.1 0 If the standard deviation of the factor F1 is 15%. Consider a portfolio with weight in funds D and E given by (0.4, 0.6). What is the factor risk and non-factor risk of the portfolio? What is the portfolio's standard deviation? Problem 4 (10 pts) Consider a two-factor model. There are three funds A, B, C in the market. The F1 sensitivities, F2 sensitivities, and expected returns are given as below: Funds A B Sensitivities (61) 3.0 2.0 0 Sensitivities (62) 1.5 0 3.0 Expected Returns Hi 0.3% 0.24% 0.19% (a) Create a portfolio free of both Fi and F2 risk. What is the expected return of the portfolio? (b) Suppose there are additional funds D and E Funds D E Sensitivities (61) 0.2 3.5 Sensitivities (62) 0 Expected Returns Mi 0.25% 0.3% Non-factor Risk (ci) 0.4 0.1 0 If the standard deviation of the factor F1 is 15%. Consider a portfolio with weight in funds D and E given by (0.4, 0.6). What is the factor risk and non-factor risk of the portfolio? What is the portfolio's standard deviation