Construct portfolio with assets that have factor loadings

Assignment Help Financial Management

Reference no: EM131984092

There are three assets with returns r1, r2, r3, whose variation is completely explained by two factors F1 and F2:

r1 = 0.04+2F1-F2

r2 = 0.11+3F1

r3 = 0.08-6F1+3F2

Suppose that the factors are demeaned (E(F1) = E(F2) = 0) and uncorrelated.

1. Construct two portfolios with the three assets that have factor loadings (1,0) and (0,1) respectively (one portfolio has exposure only to F1, and the second has exposure only to F2)? What is the portfolios expected return?

2. Construct a portfolio with the three assets that have factor loadings (0, 0).

3. What is the risk free rate in the economy? What are the portfolios risk premia?

Reference no: EM131984092

Questions Cloud

Why does the government subsidizes student loans : Why does the government subsidizes student loans? What would happen as a result of lenders pulling out of this market?

What do you think about health-care professionals : What do you think about health-care professionals disclosing information to clients about poor prognosis, even though the information may cause severe distress.

Imply weaker price competition : "Niche strategies are generally more profitable than "mass market" strategies because they usually imply weaker price competition." Comment.

Implementing industrial policy : What are the benefits and challenges when implementing Industrial policy? How does comparative advantage relate the implementation of industrial policy?

Construct portfolio with assets that have factor loadings : What is the risk free rate in the economy? What are the portfolios risk premia? Construct a portfolio with the three assets that have factor loadings (0, 0).

What should your income be in 2018 when cpi has increased : Supposed you earned $63,572 in 2015 when CPI was 237.02, to keep up with inflation what should your income be in 2018 when CPI has increased to 249.56?

Basis of international division of labor : What do you think of an idea of comparative advantage as a basis of international division of labor?

Describe a topic for an upcoming meeting that would appeal : Describe a topic for an upcoming meeting that would appeal to your target audience. Potential advantages of membership in the organization.

Discuss the reasons for the negative opinions provided : Select a company, locate an annual report and discuss the specific elements of the audit report. Discuss the reasons for the negative opinions provided

User Account

All Pages