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QUESTION 1: (a) Suppose there are three portfolios (X.Y, Z) on the APT straight line with the following parameters: X Y Z Mean 4% 8%

QUESTION 1: (a) Suppose there are three portfolios (X.Y, Z) on the APT straight line with the following parameters: X Y Z Mean 4% 8% 12% Beta 1 2 3 Specific risk 0 0 0 Respectively.

What is the zero-beta rate (E(Rz)) and what is the risk premium (E(RI)-E(Rz))?

(b) Explain the arbitrage pricing theory (APT). What are its assumptions?

(c) How does the APT differ from the CAPM?

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