2. Suppose there are two independent risk factors governing securities returns according to the two factor APT. The risk-free rate is 10%. The following well-diversified portfolios exist: beta with respect beta with respect Expected Return to factor 1 to factor 2 Portfolio #1 25% Portfolio #2 25% (a) What are the expected returns on each of the two risk factors in this economy? (b) Suppose another portfolio has a beta with respect to the first factor of 1, a beta with respect to the second risk factor of 1, and an expected return of 14%. Is this consistent with the APT? (Explain your answer) If not, what asset you would want to short in an arbitrage portfolio