Suppose that three stocks ( A, B and C ) and two common risk factors ( 1 and 2 ) have the following relationship:

E(RA) = (1.1) 1 + (0.8) 2

E(RB) = (0.7) 1 + (0.6) 2

E(RC) = (0.3) 1 + (0.4) 2

A) If1 = 4% and 2 = 2%, calculate the expected returns on each stocks.

(7.5 marks)

B) What are the prices expected next year for each of the stocks?

(Assume that all three stocks currently sell for RM30 and will not pay a dividend in the next year).

(4 marks)

C) The next year prices for Stocks A, B and C will actually be RM31.50, RM35.00 and RM30.50.

Demonstratethe net initial investment for this portfolio.

(3 marks)

D) The weights of this portfolio are WA = -0.5, WB = +1.0, and WC = -0.5.

Calculate the net exposure to Risk Factors.

(6.5 marks)

E) What is the profit from this investment?

(4 marks)