Question: Problem 2: Consider a world in which asset returns are generated by a two-factor model: Portfolio Beta of F Beta of F2 0.5 0.2 -0.5

Problem 2: Consider a world in which asset returns are generated

Problem 2: Consider a world in which asset returns are generated by a two-factor model: Portfolio Beta of F Beta of F2 0.5 0.2 -0.5 Expected Return 1.120 1.134 1.120 1. Assuming that the APT holds for these portfolios, find the factor risk prices ! and 2. 2. Suppose that a fourth portfolio D exists with expected return 1.10 and factor loadings 10-2 and 2D-O. Does an arbitrage opportunity exist? Explain. Problem 2: Consider a world in which asset returns are generated by a two-factor model: Portfolio Beta of F Beta of F2 0.5 0.2 -0.5 Expected Return 1.120 1.134 1.120 1. Assuming that the APT holds for these portfolios, find the factor risk prices ! and 2. 2. Suppose that a fourth portfolio D exists with expected return 1.10 and factor loadings 10-2 and 2D-O. Does an arbitrage opportunity exist? Explain

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