Question: please help Question 16 > Suppose that there are two independent economic factors, F, and Fz. The risk-free rate is 2.5%, and all stocks have

please help Question 16 > Suppose that there are two independent

please help

Question 16 > Suppose that there are two independent economic factors, F, and Fz. The risk-free rate is 2.5%, and all stocks have independent firm-specific components with a standard deviation of 15%. Portfolios A and B are both well-diversified with the following properties: Portfolio B for F, B for Fz Expected return 1.5 -0.5 15% B 1.0 0.5 15% What is the risk premium of the second factor, i.e., E[F]? B 5% 10% 15% 20% D Hint: Assignment 2 Question 13 Multi-Factor APT Multi-factor APT uses more than one systematic factor: E[r] = Bu1E[F1] +B12E[F2] + ... + Bi.E[F] Requires formation of tradable factor portfolios that are uncorrelated with other factor portfolios What factors? - Factors that are important to the general economy - Factors related to firm characteristics

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