Question 4: APT and Canadian Tradition (11 marks) A. The following table provides values of sensitivities and expected returns for portfolios of P, Q and T. Suppose portfolio returns can be described by a 2-factor model with intercept (3 factors including intercept), and the weights have to be greater than or equal to 0. Determine the equation that describes the equilibrium returns for the following portfolios. Portfolio Bil Expected Return (%) P 1.2 0.6 13.5 Q 0.8 15.7 T 1.2 1.5 20.2 Bi2 1.2 (8 marks) B. Suppose portfolio Y with the following characteristics: Actual Return 18.5 %; By = 1.35 and Bra= 0.95. Would you recommend investment in portfolio Y? Why