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  3. your portfolio has a two-factor structure with a b

Your portfolio has a two-factor structure with a beta of 0.5 with respect to the...

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Finance

  1. Your portfolio has a two-factor structure with a beta of 0.5 with respect to the first factor and a beta of 0.8 with respect to the second factor. This data is incorporated in the table along with the return on the risk free asset and on two pure factor portfolios, the first having a beta of 1 with respect to the first factor, and the second having a beta of 1 with respect to the second factor.

Portfolio

b1

b2

Return

Portfolio i

0.5

0.8

10.30

Pure factor 1 portfolio

1

7.00

Pure factor 2 portfolio

1

10.00

risk free asset

4.00

Suppose you wish to immunise your portfolio from factor risk. Show how this might be done. What is the expected return on the immunised portfolio?

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