Q2. Consider an economy where two systematic risk factors perfectly describe the returns on common stocks. That is, for an asset i, the asset's expected return is given by E(ri)= rf+i,1RP1+i,2RP2, where RP1 and RP2 are the expected premia for the factor 1 and factor 2 , respectively. The following table gives the loadings (betas) of the stocks AAA and BBB to the two factors, as well as the expected returns of each stock: The risk-free rate is 2%. 1. Consider a portfolio, XYZ, made up by purchasing $100 of security AAA and purchasing $200 of BBB. How sensitive will this portfolio be to each of the two factors, i.e. the beta of the portfolio due each of the two factors? (Hint: write down the return of XYZ as a function of the returns of AAA and BBB.) 2. What combination of assets AAA,BBB, and the risk-free asset will have a beta of 1 with respect to factor 1 and have a beta of 2 with respect to factor 2