Expected returns for pure factor portfolios

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Suppose there is a three-factor model, so stock returns depend on three systematic risk factors (F1, F2, F3) which have a mean of 0.

r˜1 = 0.04 + 7F˜ 1 + 4F˜ 2 + 2F˜ 3 + ˜1

r˜2 = 0.01 + 4F˜ 1 - 6F˜ 2 - 3F˜ 3 + ˜2

r˜3 = 0.08 + 4F˜ 1 + 8F˜ 2 + 4F˜ 3 + ˜3

Find the portfolio weights and expected returns for the pure factor portfolios for F1. What is the factor risk premium for factor 1?

Compute the portfolio weights which produce a portfolio with no systematic risk (i.e. 0 beta on all factors). What is its expected return?

Reference no: EM133392556

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