Q2: There are two priced risk factors, the market (M) risk factor and interest rate (IR) risk factor. Portfolio (A) is well diversified across the two risk factors: Factor Loadings BAM = 1.25 BA.IR = 0.5 Factor Risk Premiums E(rm)-rf = 0.06 E(ri)-rf = 0.08 rf = 0.04 If the APT holds, the expected return for portfolio (A) is: 1. Less than 11.5% 2. At least 11.5%, less than 15% 3. At least 15%, less than 16% 4. Greater than 16%