As a senior financial analyst of an investment bank, you are charged with the responsibility of estimating the expected returns of various securities. One o the securities you want to estimate is expected return in Alpha Steel works Ltd.

You have decided to use arbitrage pricing model and you have derived the following estimates for the factor betas and risk premiums.

Factor	Beta	Risk premiums %
1 2 3 4 5	1.2 0.6 1.5 2.2 0.5	2.5 1.5 1.0 0.8 1.2

Required:

Identify the risk factor for Alpha Steel Works Ltd. (2 marks)

If the risk free rate is 5%, estimate the expected return on Alpha Steel Works Ltd. (2 marks)

On the basis of a one-factor model, Mwangi assumes that the risk free rate is 6% and the expected return on a portfolio work unit sensitivity to the factor is 8.5%. Consider a portfolio of two securities with the following characteristics:

Security	Factor sensitivity	Proportion
A B	4.0 2.6	0.3 0.7

According to the arbitrage pricing theory, what is the portfolios equilibrium expected return? (2 marks)