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

question 71

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. The weighted exposure to risk factor 2 for stocks X, Y, and Z are

• 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:

Habitual

Pertaining to behaviors or actions that are performed regularly and become automatic or routine.

Life Narrative

The story a person constructs and tells about their life, encompassing past experiences, current identity, and future goals.

Personality Trait Levels

Refers to the degree or intensity of specific traits an individual exhibits, which contribute to their overall personality composition.

Levels of Narcissism

Refers to the spectrum of narcissistic traits exhibited by an individual, ranging from healthy self-esteem to pathological narcissism.