Question 5 i. Mr. Niraj Panday has categorized all the available stocks in the market into the following types: Small cap value stocks ii. Small cap growth stocks iii. Large cap value stocks iv. Large cap growth stocks He has also estimated the weights of the above categories of stocks in the market index. Further more, the sensitivity of returns on these categories of stocks to the three important factors are estimated to be: Category of Weight in Factor I Factor II Factor III Stocks the Market (Market) (Price/Book) (average Index Capitalization) Small Cap 10% 0.90 0.75 1.25 value Small cap 0.80 1.39 1.35 0.85 2.05 6.75 1.165 2.75 8.65 25% growth Large cap 15% value Large cap 50% growth Risk Premium (FRP) The risk free rate of return is 4.5% 6.85% -3.5% 0.65% a. Required: Using Arbitrage Pricing Theory, determine the expected return on the market index. b. Using Capital Asset Pricing Model, determine the expected return on the market index. Mr. Niraj Pandey wants to construct a portfolio constituting only the 'small cap value' and 'large cap growth' stocks. If the target beta for the portfolio is one, determine the composition of his portfolio. c