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Unformatted text preview: a = 1a Aa B . Also, the response of the return on P to the factors is given by: b P 1 = a A b A 1 + a B b B 1 b P 2 = a A b A 2 + a B b B 2 . Finally, note that the expected return on P , μ P , is given by: μ P = a r + a A μ A + a B μ B . (c) Asset C also traded in this market and yields an average return of 12% with b C 1 = 1 . and b C 2 = 0 . 5 . What inferences would you draw about the asset market from this information? 2. Explain the implications of assuming that asset returns are determined according to a threefactor model in which each factor is the rate of return (in excess of the riskfree rate) on a given portfolio. What considerations should determine how the three given portfolios (factors) are deﬁned? *****...
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This note was uploaded on 03/21/2011 for the course ECON 6120 taught by Professor Crabbe during the Spring '11 term at University of Ottawa.
 Spring '11
 CRABBE

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