8. Consider a market where two risk factors are sufficient to describe the returns on common stock. The following table gives the sensitivities of the stocks of ABC inc. and PQR Inc. to the two factors, as well as their expected returns. Security RI E[Ri] ABC 0.5 16.2 POR 1.5 L.4 21.6 Riskless 0.0 10.0 (1) Consider a portfolio, C, made up by selling short $0.50 of security PQR and Purchasing $1.50 of ABC with the proceeded and with $1.00 of your own money in portfolio C. How sensitive will this portfolio be to each of the two factors? (ii) Consider a portfolio, D, made up by borrowing $1.00 at the risk free rate and investing it with $1.00 Of your own money in portfolio C. How sensitive will this portfolio be to each of the factors? What combination of securities ABC, PQR and the riskless security will move on one-to-one basis with factor 1 and be insensitive to factor 2? (iv) You have discovered another portfolio P with the following characteristics: E[re] 0.8 Design an arbitrage to earn your $1M (reference part (iii) above)