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Question 1 (10 points) Suppose that there are two factors represented by: (1) return on the market portfolio rM (2) return on Treasury bond portfolio
Question 1 (10 points) Suppose that there are two factors represented by: (1) return on the market portfolio rM (2) return on Treasury bond portfolio rv: Suppose that the risk-free rate and the factor risk premiums are the following: 5%8% Assets A, B and C have the following factor betas: - 0 2% Asset bMbN A 1.0 1.0 B 1.5 0.2 C1.0 06 a) b) What are the expected returns on assets A, B and C? (4 points) Suppose the expected return on asset A is 10%. Construct Two possible arbitrage portfolios and determine their returns. (6 points)
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