In the world of APT, there is only one factor called the market. In the same economy, there is a company

(Applied Predictive Companies) APT. The return of APT is 15%. The return on the factor, i.e., the market

portfolio is 8%. The risk-free rate is 1%.

a. If the stock of APT is fairly priced, what would be the beta of APT?

b. If the beta of APT is 2, compute the alpha of APT.

c. Compute an arbitrage portfolio to exploit the mispricing (I want to see the weights of the

portfolio)

d. Based on the answer in d), explain how you would use the arbitrage portfolio to make a profit.

Compute such profit.

Now assume there is a second factor, called COVID-19. The return of the COVID-19 factor is -10%. The

sensitivity of APT with respect to COVID-19 is 1.6.

e. With the introduction of the second factor, is there still an alpha for APT?

f. Construct an arbitrage portfolio to exploit the mispricing. Specify how to exploit