Question: Consider a 2-factor model. The risk free rate is r; = 1%. There are two factors, f1 and f2, with respective factor risk prices of

Consider a 2-factor model. The risk free rate is r; =

Consider a 2-factor model. The risk free rate is r; = 1%. There are two factors, f1 and f2, with respective factor risk prices of .11 = 5%, A; = 7%. Consider two risky assets, with loadings given in the following table Loading: clor1 factorz Construct a portfolio ofthe two risky assets and the risk-free asset (the sum of portfolio weights is 1}with zero loading on the rst factor. and a loading OH on the second factor. Assume that the APT relation holds exactly for the two risky assets in this problem. What is the expected return on this portfolio

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