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How do calculate the expected return for each asset

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Problem 1: Assume that there are two factors that price assets. Risk free rate is 3%. Factor 1 has an expected return of 6% and factor 2 has an expected return of 7%. Calculate the expected return for each asset with the following sensitivities using the Arbitrage Pricing Theory (APT):

(a) β1 =1,β2 =2;

(b) β1 = 1.5, β2 = -0.50;

(c) β1 = 0.5, β2 = 1.5.

Reference no: EM132959992

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