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uppose that a two-factor model, where the factors are the market return (Factor 1) and the rowth rate of industrial production (Factor 2), correctly describes the return generating rocesses of all assets and the corresponding two-factor APT correctly prices three well- iversified portfolios, A, B, and C. Expected Return Portfolio ABC 19% 20% 6% Sensitivity to Factor Sensitivity to Factor 2 1 1.5 1 0 120

uppose that a two-factor model, where the factors are the market return (Factor 1) and the rowth rate of industrial production (Factor 2), correctly describes the return generating rocesses of all assets and the corresponding two-factor APT correctly prices three well- iversified portfolios, A, B, and C. Expected Return Portfolio ABC 19% 20% 6% Sensitivity to Factor Sensitivity to Factor 2 1 1.5 1 0 120

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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 What are the risk premiums of the two factors and what is the risk-free rate?

Suppose that a two-factor model, where the factors are the market return (Factor 1) and the growth rate of industrial production (Factor 2), correctly describes the return generating processes of all assets and the corresponding two-factor APT correctly prices three well- diversified portfolios, A, B, and C. Expected Return Portfolio A B C 19% 20% 6% Sensitivity to Factor Sensitivity to Factor 2 1 2 0 1 1.5 1 0
Transcribed Image Text:Suppose that a two-factor model, where the factors are the market return (Factor 1) and the growth rate of industrial production (Factor 2), correctly describes the return generating processes of all assets and the corresponding two-factor APT correctly prices three well- diversified portfolios, A, B, and C. Expected Return Portfolio A B C 19% 20% 6% Sensitivity to Factor Sensitivity to Factor 2 1 2 0 1 1.5 1 0
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