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Returns of individual securities

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Reference no: EM132468027

Problem: Assume that the returns of individual securities are generated by the following two-factor model:

R = E[R] + beta1*F1 + beta2*F2

Security beta1 beta2 E[R]

3 2 1 5%

4 3 1.5 5%

  1. Construct a portfolio using securities 3 and 4 such that by combining them you manage to eliminate all risk, i.e. the portfolio betas you obtain in front of factors F1 and F2 are zero
  2. Assume now the existence of a riskless asset (T-bill) returning a whooping 3% Devise an arbitrage strategy using your result from part 1.

Reference no: EM132468027

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