3. You have divided the whole market in 4 portfolios following 2 dimensions: Value/Growth and Small/Large. The weight of each portfolio in the index is given. The risk free rate is 2%. Furthermore, you have designed the following model: Portfolios Weight Sensitivity, B1, to Sensitivity, Bu, to Sensitivity, Pm, to Factor Factor II Factor III (Market risk) (Price/Book) (Avg Capitalization) Small Value 10% 0.9 1.15 0.7 Small Growth 1.3 1.25 0.8 Large Value 45% 0.8 1.1 1.05 Large Growth 35% 1.2 0.7 1.02 Risk premium 5% -1% 1% 10% a) Using the APT, which portfolio has the highest expected return? Show your calculations. [10 marks] .. [Answer the question on a plain A4 paper).... [Show all the steps)... b) Using the APT, what is the expected return of the market? [2 marks) ..[Answer the question on a plain A4 paper] ... [Show all the steps)......... 5 of 7 c) One of your competitors uses the CAPM. Based on the betas above, which portfolio will he choose to maximise his expected return? [5 marks] [Answer the question on a plain A4 paper). .. [Show all the steps)...... 4. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.75 and an expected return of 12%. The risk- free rate of return is 4%. a. Draw a fully labelled diagram on the space provided showing the expected return against beta of Portfolios A and B. (5 marks] 6 of 7 3. You have divided the whole market in 4 portfolios following 2 dimensions: Value/Growth and Small/Large. The weight of each portfolio in the index is given. The risk free rate is 2%. Furthermore, you have designed the following model: Portfolios Weight Sensitivity, B1, to Sensitivity, Bu, to Sensitivity, Pm, to Factor Factor II Factor III (Market risk) (Price/Book) (Avg Capitalization) Small Value 10% 0.9 1.15 0.7 Small Growth 1.3 1.25 0.8 Large Value 45% 0.8 1.1 1.05 Large Growth 35% 1.2 0.7 1.02 Risk premium 5% -1% 1% 10% a) Using the APT, which portfolio has the highest expected return? Show your calculations. [10 marks] .. [Answer the question on a plain A4 paper).... [Show all the steps)... b) Using the APT, what is the expected return of the market? [2 marks) ..[Answer the question on a plain A4 paper] ... [Show all the steps)......... 5 of 7 c) One of your competitors uses the CAPM. Based on the betas above, which portfolio will he choose to maximise his expected return? [5 marks] [Answer the question on a plain A4 paper). .. [Show all the steps)...... 4. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.75 and an expected return of 12%. The risk- free rate of return is 4%. a. Draw a fully labelled diagram on the space provided showing the expected return against beta of Portfolios A and B. (5 marks] 6 of 7