1. You are using a two-factor APT model to find the fair expected return on a well-diversified portfolio P that promises an actual expected return of 18%. The relevant factor portfolios, their betas in portfolio P, and their factor risk premia are shown in the table below. The risk-free rate is 2.5%.

Factor	Factor Beta	Factor risk premium
A	1.2	12%
B	0.8	-3.5%

a) According to the APT, what is the fair expected return on the portfolio P?

b) Suppose there exists an additional portfolio Q, which has a beta of 1 on each factor and an expected return of 15.875%. Assuming the risk premium on Factor A is estimated correctly, what must the risk premium on Factor B be to exclude arbitrage opportunities between P and Q?