You live in a world where asset prices are determined by three factors: The price of oil, the price of lithium, and a CAPM-style market factor. Below are the returns on several useful assets:

Asset	Return
Riskless government debt	1.2%
Well-diversified portfolio of firms exposed to lithium prices	9.1%
Well-diversified portfolio of firms unaffected bylithium prices	8.8%
Well-diversified portfolio of firms exposed to oil prices	13.8%
Well-diversified portfolio of firms unaffected by oil prices	14.9%
Broad based index fund	12.4%

a. Using the asset returns above, what are the factor values for each of the three factors?

b. What would be the expected return on an asset with a market beta of 0.9, a lithium beta of 1.4, and an oil beta of -.3?

c. Under the APT, what mechanism is responsible for enforcing the security market line?

Answer rating: 100% (QA)

a To calculate the factor values for each of the three factors the market factor lithium factor and ... View the full answer