Question 1. Suppose that a two-factor model, where the Gactors are the market return (Factor 1) and the growth rate of industrial production (Factor 2), correctly describes the return generating processes of all assets and the corresponding two-factor APT correctly prices three welldiversified portfolios, A,B, and C. a. What are i) the risk preminums of the rwo factors and ii) the risk-free rate? (4 marks) b. Another well-diversified portfolio D has sensitivities 1 to factor 1 and 0.5 to factor 2, respectively. What is the APT-consistent expected return on Portfolio D? (2 marks) c. Suppose that Portfolio D's expected return is 12%. Given your answers above, design an arbitrage strategy involving Portfolios A,B,C, and D. (Hint: an arbitrage strategy requires no initial investment, has no risk and yet generates a positive retura.) (4 marks) (Total for Question: 10 marks)