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Assume that there are two factors that price assets. Interest rate rf=3%. You have the...

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Accounting

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Assume that there are two factors that price assets. Interest rate rf=3%. You have the following information about two well-diversified arbitrage-free risky assets. Total: 35 marks. Answer the following questions: (a) Calculate the risk premium of two risk factors. (15 marks) (b) There is a third well-diversified portfolio with 1=1.2 and 2=0.8. What is this portfolio's arbitrage free expected return? (5 marks) (c) Suppose the forecasted return of the portfolio in the question (b) is 10%. Show how you could construct an arbitrage portfolio. (15 marks)

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