An APT model is based on three mutually independent systematic factors \(F_{1}, F_{2}\), and \(F_{3}\). The annual risk-free rate, with annual compounding, is \(4 \%\) (below we assume annual returns). We consider three well-diversified portfolios, \(i=A B C\), with the following features:

- Find the coefficients characterizing the APT model.
- Find the expected return of a portfolio with unit exposure to \(F_{1}\), neutral to \(F_{2}\) and \(F_{3}\).

Transcribed Image Text:

Portfolio Bi1 Bi2 Bi3 E[7] A 1.5 -0.9 2.0 8.5% B 0.5 1.2 0.6 12.8% C -0.1 0.4 -0.3 4.9%