corporate finance

21. The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors, Investments X, Y, and Z have the following sensitivities to these two factors: bi bz 1.75 0.25 Investments X Y Z 1.00 2.00 2.00 1.00 Assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills offer zero tisk premium. 1. According to the APT, what is the risk premium on each of the three stocks? b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? c. Suppose you buy $80 of X and $60 of Y and sell $40 of 2. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? d. Finally, suppose you buy $160 of X and $20 of Y and sell $80 of Z. What is your portfolio's sensitivity now to each of the two factors? And what is the expected risk premium? e. Suggest two possible ways that you could construct a fund that has a sensitivity of .5 to factor I only. (Hint: One portfolio contains an investment in Treasury bills.) Now compare the risk premiums on each of these two investments