Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 45

Multiple Choice

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } \text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \\\hline \mathbf { X } & - 0.55 & 1.2 \\\mathbf { Y } & - 0.10 & 0.85 \\\mathbf { Z } & 0.35 & 0.5\end{array}$$
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. What are the weighted exposures to risk factor 1 for stocks X, Y, and Z?

• A) 0.50, -1.0, 0.50
• B) -0.50, 1.0, -0.50
• C) 0.60, -0.85, 0.25
• D) -0.275, 0.10, 0.175
• E) None of the above.

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Definitions:

Online Experiments

Research studies conducted over the internet, allowing for the collection of data from a broad geographic distribution of participants.

Diffusion

The method in which a new idea is shared across specific channels over a period among individuals within a social structure.

Internal Validity

The extent to which a research study accurately establishes a cause-effect relationship between the treatment and the observed outcome, minimizing the confounding variables.

Random Assignment

A method used in experiments where participants are allocated to different groups purely by chance, minimizing bias and equalizing other variables.