FF alpha CAPM alpha Problem 2: Portfolio risk management (50 points) Assume you have the following two trading strategies Name Observedb CAPM E(R)-Rf beta R1-Rf 1.025% | 1.218 0.286 0.940 | 1.417 R2-Rf 0.710% 1.128 0.813 | -0.234 1.248 | 0.029 10.196 -0.114 -0.110 R1-0.5*R2-0.5*Rf (a) (10 points) Assume you consider the following trading strategy R1-0.5*R2-0.5*Rf. What does this strategy involve, i.e. how do you raise money and where do you invest them. HINT: there is more than one correct explanation here, I just need one. (b) (20 points) What would be the expected return on this strategy? What would be Fama French factor loadings on this strategy. What would be its CAPM beta? What would be the Fama French and CAPM pricing errors for this trading strategy? Write your answers in the Table above. (c) (20 points) Consider the trading strategy R1-0.5*R2-0.5*Rf. Construct a new strategy while removing BOTH SIZE and VALUE risk from this strategy (from R1-0.5*R2-0.5* Rf)? FF alpha CAPM alpha Problem 2: Portfolio risk management (50 points) Assume you have the following two trading strategies Name Observedb CAPM E(R)-Rf beta R1-Rf 1.025% | 1.218 0.286 0.940 | 1.417 R2-Rf 0.710% 1.128 0.813 | -0.234 1.248 | 0.029 10.196 -0.114 -0.110 R1-0.5*R2-0.5*Rf (a) (10 points) Assume you consider the following trading strategy R1-0.5*R2-0.5*Rf. What does this strategy involve, i.e. how do you raise money and where do you invest them. HINT: there is more than one correct explanation here, I just need one. (b) (20 points) What would be the expected return on this strategy? What would be Fama French factor loadings on this strategy. What would be its CAPM beta? What would be the Fama French and CAPM pricing errors for this trading strategy? Write your answers in the Table above. (c) (20 points) Consider the trading strategy R1-0.5*R2-0.5*Rf. Construct a new strategy while removing BOTH SIZE and VALUE risk from this strategy (from R1-0.5*R2-0.5* Rf)