Problem 4 (10 pts) Consider a two-factor model. There are three funds A, B, C in the market. The F1 sensitivities, F2 sensitivities, and expected returns are given as below: Funds Sensitivities (6) Sensitivities (62) Expected Returns Hi 3.0 1.5 0.3% B 2.0 0 0.24% 0 0.19% 3.0 (a) Create a portfolio free of both F1 and F2 risk. What is the expected return of the portfolio? (b) Suppose there are additional funds D and E Funds Sensitivities (b) Sensitivities (62) Expected Returns Hi Non-factor Risk (Ca) D 0.2 0 0.25% 0.4 E 3.5 0 0.3% 0.1 If the standard deviation of the factor F1 is 15%. Consider a portfolio with weight in funds D and E given by (0.4, 0.6). What is the factor risk and non-factor risk of the portfolio? What is the portfolio's standard deviation? Problem 4 (10 pts) Consider a two-factor model. There are three funds A, B, C in the market. The F1 sensitivities, F2 sensitivities, and expected returns are given as below: Funds Sensitivities (6) Sensitivities (62) Expected Returns Hi 3.0 1.5 0.3% B 2.0 0 0.24% 0 0.19% 3.0 (a) Create a portfolio free of both F1 and F2 risk. What is the expected return of the portfolio? (b) Suppose there are additional funds D and E Funds Sensitivities (b) Sensitivities (62) Expected Returns Hi Non-factor Risk (Ca) D 0.2 0 0.25% 0.4 E 3.5 0 0.3% 0.1 If the standard deviation of the factor F1 is 15%. Consider a portfolio with weight in funds D and E given by (0.4, 0.6). What is the factor risk and non-factor risk of the portfolio? What is the portfolio's standard deviation