Suppose that the returns of an asset i satisfy the two-factor model ri = ai + biF1+ b:2F2, i = 1, ...,n, where ba and biz are factor loadings of the risk factors Fi and F2 respectively. Consider a portfolio r = wri + (1 -w)rj , (4) where the assets i and j are chosen such that ba * by and biz * bj2. (a) For the portfolio given in (4), what is Er? (b) For the portfolio r in (4) to have no exposure to any factor risk, the factor loadings ba, b2, by1, and bj2 must satisfy W= b;1 bj2 bj1 - bil bj2 - biz for all i and j. (c) Under the condition in part (b) and using the no arbitrage argu- ment, show that there exists a constant do such that Side = 1 for all i, where ci is a constant. (d) Show that there exist constants , and 12 such that the expected return #; for any asset i satisfies Hi = do + X1bi1 + 12biz