6.Consider a two-factor APT. The two factors are M1 and M2. The risk-free rate is 5%. The risk premium for M1 (R_M1) = 8.71%. Portfolios A and B are well diversified. Given the data below, calculate the risk premium for M2 (i.e., R_M2) and expected return for Portfolio B based on APT.

Portfolio Beta on M1 Beta on M2 APT-based E(r_P)

A 1.5 1.75 35%

B 1.0 0.65 ?

(Hint: use the two-factor APT model: E(r_P) = r_f + b_M1R_M1 + b_M2R_M2)