Question: Suppose that stock returns are generated by a two-factor model. The expected returns and factor sensitivities of two well-diversified mutual funds, Brix and Clix, are

Suppose that stock returns are generated by a two-factor model. The

Suppose that stock returns are generated by a two-factor model. The expected returns and factor sensitivities of two well-diversified mutual funds, Brix and Clix, are given in the table below. The risk-free rate is 2% (a) Suppose that you have $100 to invest and you decide to put $30 in the Brix fund and $70 in the Clix fund. What are the factor sensitivities of your portfolio? (b) Assume that the APT (Arbitrage Pricing Theory) holds. Compute the risk premiums 1 and 2 of the mimicking portfolios associated with factors 1 and 2

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