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Problem 5 Bookmark this page Problem 5 0 points possible (ungraded) Consider a 2-factor model. The risk free rate is ry=1%. There are two
Problem 5 Bookmark this page Problem 5 0 points possible (ungraded) Consider a 2-factor model. The risk free rate is ry=1%. There are two factors, fi and f2, with respective factor risk prices of X1 = 5%, A2 7%. Consider two risky assets, with loadings given in the following table Loadings factor 1 factor 2 Asset 1 0.80 Asset 2 3.10 1.60 0.80 Construct a portfolio of the two risky assets and the risk-free asset (the sum of portfolio weights is 100 %) with zero loading on the first factor, and a loading of 1 on the second factor. Assume that the APT relation holds exactly for the two risky assets in this problem. What is the expecte return on this portfolio?
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