Consider an economy where two systematic risk factors are sufficient to describe the returns on common stocks. For an asset i, the asset's expected return is given by E(ri) =rf+BiRR1+Bi.2 RP2, where RP1 and RP2 are the expected premia for the factor 1 and factor 2, respectively. Both factors are independent. The following table gives the loadings (betas) of the stocks AAA and BBB to the two factors, as well as the expected returns of each stock: Stock Bil Bi.2 Eri) AAA 1.2 0.5 12% BBB 1.5 1.1 16% The risk-free rate is 3%. a. What are the expected premia of factor 1 and factor 2? b. Consider a portfolio, DDD made up by purchasing $0.50 of security AAA and purchasing $1.50 of BBB. How sensitive will this portfolio be to each of the two factors, i.e. the beta of the portfolio due each of the two factors? c. What combination of assets AAA, BBB, and the risk-free asset will have a beta of 1 with respect to factor 1 and have a beta of 1.5 with respect to factor 2. Consider an economy where two systematic risk factors are sufficient to describe the returns on common stocks. For an asset i, the asset's expected return is given by E(ri) =rf+BiRR1+Bi.2 RP2, where RP1 and RP2 are the expected premia for the factor 1 and factor 2, respectively. Both factors are independent. The following table gives the loadings (betas) of the stocks AAA and BBB to the two factors, as well as the expected returns of each stock: Stock Bil Bi.2 Eri) AAA 1.2 0.5 12% BBB 1.5 1.1 16% The risk-free rate is 3%. a. What are the expected premia of factor 1 and factor 2? b. Consider a portfolio, DDD made up by purchasing $0.50 of security AAA and purchasing $1.50 of BBB. How sensitive will this portfolio be to each of the two factors, i.e. the beta of the portfolio due each of the two factors? c. What combination of assets AAA, BBB, and the risk-free asset will have a beta of 1 with respect to factor 1 and have a beta of 1.5 with respect to factor 2