1. A portfolio manager forms two well-diversified portfolios that are each sensitive to the single factor. The following information is available: Portfolio Expected Return Factor Sensitivity A 0.16 1.5 B 0.10 0.5 a. Based on the information given, calculate the risk-free rate and the risk premium associated with the factor, based on the single-factor arbitrage pricing theory (APT) (4 marks) b. Portfolio C that has a factor sensitivity of 2.0 to the factor. Calculate the expected return on Portfolio C. (2 marks) c. Suppose the portfolio manager forms two more portfolios, Portfolios D and E. Portfolio D has been formed by investing 50% in Portfolio A and 50% in Portfolio C. The expected return and factor sensitivity for Portfolio E are 18.5% and 1.75, respectively. Evaluate whether any arbitrage opportunity exists and comment on how an investor may exploit it. (4 marks)