(a) Assume a one-factor model of the form: ri=4%+biF+ei Consider three well diversified portfolios which have zero non-factor risk. The expected value of the factor is 8%. a) Identify the portfolio whose returns are not in line with the factor model relationship. (5 marks) b) Construct a self-financing combination of the other two portfolios that has the same factor sensitivity as the 'out of line' portfolio? What is the expected return of that combination? (7 marks) c) What action would you expect investors to take regarding these three portfolios? How long will their action last? (3 marks) (b) You have a well-diversified stock portfolio valued at $25,000,000 with a beta of 1.10. You have decided to hedge with CME S\&P 500 put index option contracts with a strike price of 1505 and delta of 0.70. Assume that the value of one full index point is worth $250. How many option contracts would you require to hedge