1. The expected returns on the APT factors and the sensitivities of a stock Y to the factors are given as follows: Factor F1 F2 F3 Expected Return on the Factor 6.0% -2.0% 4.0% Sensitivities 0.01 -0.50 1.10 Assuming that the risk-free rate of return is 5%, what is the expected return on the stock? 2. Consider a world in which asset returns are generated by the 2-factor linear model: r=a;+b F+b F+e; il 1 We observe three portfolios with the following expected returns and factor loadings: Portfolio Expected Return bi1 biz A 0.12 1 0.5 B 0.134 3 0.2 C 0.12 3 -0.5 (a). assuming that the APT holds for these portfolios, find the prices of factor risk and 22. (b). suppose that a fourth portfolio, D, exists with expected return 0.10 and factor loadings bD1=2 and bD2=0. Does an arbitrage opportunity exist? Explain.