Question: Problem 1 (40') Consider the multifactor APT. There are two economic factors, F, and F2, and they are independent. The risk-free rate of return is

Problem 1 (40') Consider the multifactor APT. There are two economic factors, F, and F2, and they are independent. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: Portfolio A Portfolio B Factor Sensitivity for F Factor Sensitivity for F, Annual Expected Return Bar = +1.0 BA2 = +2.0 19% Bei = +2.0 BB2 = +2.0 22% Assume portfolios A and B are efficiently priced. Please answer following questions. D) We observe a well-diversified portfolio C. Its betas on F, and Fare Bei = 2.0 and Bcz = 0, and its annual expected return is 16%. Is portfolio C underpriced, or overpriced

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