Assume that there are two factors that price assets. Risk free rate is 4%. Factor 1 has an

expected return of 8% and factor 2 has an expected return of 10%. Calculate the expected

return for each asset with the following sensitivities using the Arbitrage Pricing Theory (APT).

Total: 10 marks.

(a) 1 = 1.2, 2 = 0.9; (5 marks)

(b) 1 = 1.5, 2 = 0.60; (5 marks)