Topic: Multifactor APT 1) Consider an economy driven by two risk factors F1 (industrial production growth) and F2 (non-farm payrolls). Two well-diversified portfolios, A and B, have the following factor loadings on the two risk factors: BA,1 = 1.5, BA,2 = 2 38,1 = 1, $8,2 = 2 The risk free rate is 5% and the expected returns on portfolios A and B are 30% and 27%, respectively. a) What are the factor risk premiums for Fi and F2? (10 points) Now consider a 3rd well-diversified portfolio C, with factor loadings c,1 = 2, 3c,2 = 1, and expected return equal to 23%. b) Is portfolio C cheap or expensive? (10 points) c) Construct an arbitrage opportunity using well-diversified portfolios A, B, and C. (20 points) Topic: Multifactor APT 1) Consider an economy driven by two risk factors F1 (industrial production growth) and F2 (non-farm payrolls). Two well-diversified portfolios, A and B, have the following factor loadings on the two risk factors: BA,1 = 1.5, BA,2 = 2 38,1 = 1, $8,2 = 2 The risk free rate is 5% and the expected returns on portfolios A and B are 30% and 27%, respectively. a) What are the factor risk premiums for Fi and F2? (10 points) Now consider a 3rd well-diversified portfolio C, with factor loadings c,1 = 2, 3c,2 = 1, and expected return equal to 23%. b) Is portfolio C cheap or expensive? (10 points) c) Construct an arbitrage opportunity using well-diversified portfolios A, B, and C. (20 points)