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There are two assets following single-factor model, Asset 1 and Asset 2. Their model parameters are given as follow, Assetii 1 0.101.5 2 0.080.5 Assume

There are two assets following single-factor model, Asset 1 and Asset 2. Their model parameters are given as follow,

Assetii

1 0.101.5

2 0.080.5

Assume E[f]=e1=e2=0.

a) Construct a zero-beta portfolio from these two risky assets.

b) Find the factor risk premium using the principle of no-arbitrage.

c) What is the meaning of factor risk premium in single-factor models?

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