2. Random returns for two well-diversified portfolios at time t are given by: At 0.27+2F1t +...

 

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2. Random returns for two well-diversified portfolios at time t are given by: At 0.27+2F1t + 0.8F2t rBt = 0.161+Ft+1.1F2t, where F1 and F2 are unexpected parts of factor 1 and 2 returns, respectively. (One can think that factor one is GDP and factor two is an inflation). The risk free rate is 1.0%. a. Construct factor portfolio for factor 1 by combining portfolios A, B, and T-bills. What are the weights of these portfolios in factor portfolio 1? What is the expected return of factor portfolio 1? b. Solve question a for factor portfolio 2 2. Random returns for two well-diversified portfolios at time t are given by: At 0.27+2F1t + 0.8F2t rBt = 0.161+Ft+1.1F2t, where F1 and F2 are unexpected parts of factor 1 and 2 returns, respectively. (One can think that factor one is GDP and factor two is an inflation). The risk free rate is 1.0%. a. Construct factor portfolio for factor 1 by combining portfolios A, B, and T-bills. What are the weights of these portfolios in factor portfolio 1? What is the expected return of factor portfolio 1? b. Solve question a for factor portfolio 2

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To calculate the weights and expected return of Factor Portfolio 1 for factor 1 we will 1 Derive the ... View the full answer