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Short Question (SQ4) (15%) Suppose asset returns are driven by three factors, GDP...

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Accounting

Short Question (SQ4)
(15%)
Suppose asset returns are driven by three factors, GDP growth rate (factor 1) and interest rate (factor 2), and Oil prices (factor 3), which are uncorrelated with one another. There are two well-diversified portfolios A and B and one stock C of interest. Their factor sensitivities are given in the following table, and so are the risk premia of the tracking portfolios for Factor 1,2, and 3.
\table[[,\table[[Factor Sensitivity for],[Factor 1]],\table[[Factor Sensitivity for],[Factor 2]],\table[[Factor Sensitivity],[for Factor 3]]],[Portfolio A,bA1=+1.2,bA2=0.5,bA3=0.3
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