QUESTION THREE a) Suppose that an institution holds Portfolio K. The institution wants to use Portfolio L to hedge its exposure to inflation. Specifically, it wants to combine K and L to reduce K L its inflation exposure to zero. Portfolios K and L are well diversified, so the manager can ignore the risk of individual assets and assume that the only source of uncertainty in the portfolio is the surprises in the two factors. The returns to the two portfolios are: RK = 0.12 +0.5FINFL + 1.0FGDP RL = 0.11 + 1.5FINFL + 2.5FGDP Calculate the weights that a manager should have on K and L to achieve this goal (4 marks)