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Suppose that a market can be described by the following three sources of systematic risk with associated risk premiums: Inflation factor has a 7% risk

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Suppose that a market can be described by the following three sources of systematic risk with associated risk premiums: Inflation factor has a 7% risk premium of its factor portfolio Interest rate factor has a 2% risk premium of it factor portfolio and Warfactor has a 16% risk premium of its factor portfolio. The return on a particular well-diversified portfolio Pis generated according to the following equation 10 10:3R15 where I, R, and Ware unanticipated components in Inflation, Interest rate, and War respectively. (6 points) 1. Find the expected rate of return of this portfolio using the APT. The T-bill rate is 7%. Is the stock overpriced or underpriced? 2. Is there any arbitrage opportunity? If so, construct one arbitrage strategy

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