Question: Problem 2: Consider a world in which asset returns are generated by a two-factor model: Portfolio Beta of Fi Beta of F2 Expected Return 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 Fi Beta of F2 Expected Return 0.5 0.2 0.5 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 B1D 2 and B2D 0. 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 Fi Beta of F2 Expected Return 0.5 0.2 0.5 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 B1D 2 and B2D 0. Does an arbitrage opportunity exist? Explain

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