Suppose that there are 2 macroeconomic factors and the expected risk premium is 8.8% on factor 1 and 13.5% on factor 2. You hold a portfolio of three stocks with the following factor betas:

Stock A: b1= -0.9 and b2= 1.2

Stock B: b1= 1.2 and b2= 0.5

Stock C: b1= -0.3 and b2= 0.6

Suppose you buy $75 of A and $50 of B and short $25 of C.

What is the factor beta of your portfolio to each of the two factors? and What is the expected risk premium of the portfolio? (portfolio b1, portfolio b2, expected risk premium)

[Hint: find the portfolio weights based on the total value of the portfolio= $75 + $50 - $25=$100]

a. (0, 0, 0%)

b. (1, 1, 22.3%)

c. (0, 1, 13.5%)

d. (1, 0, 8.8%)

e. (0.6, 0.4, 10.7%)