Question: Please help me these questions with clear calculation and explaination: Consider a two-factor economy. The risk free rate is 2%. There are two well-diversified risky

Please help me these questions with clear calculation and explaination:

Consider a two-factor economy. The risk free rate is 2%. There are two well-diversified risky assets with the following information. Assume the market is arbitrage free.

(1) What are the risk premiums of factor portfolio 1 and 2?

(2) A well-diversified risky asset has 1 = 1.2 and 2 = 0.8. What is its arbitrage-free

expected return?

(3) If the forecasted return of asset in (2) is 18%. Indicate an arbitrage transaction that could be used to profit from this pricing situation.

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