Problem 1 (40') Consider the multifactor APT. There are two economic factors, Fi 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% BB1 = +2.0 BB2 = +2.0 22% Assume portfolios A and B are efficiently priced. Please answer following questions. E) If you want to construct a risk-free arbitrage strategy to exploit the mispricing in part (D), you need to short sell a hedging portfolio. How will you construct the hedging portfolio using portfolios A, B, and the risk-free asset? (Write down the weights) Problem 1 (40') Consider the multifactor APT. There are two economic factors, Fi 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% BB1 = +2.0 BB2 = +2.0 22% Assume portfolios A and B are efficiently priced. Please answer following questions. E) If you want to construct a risk-free arbitrage strategy to exploit the mispricing in part (D), you need to short sell a hedging portfolio. How will you construct the hedging portfolio using portfolios A, B, and the risk-free asset? (Write down the weights)