You can solve just part b!! Thanks

(a) In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[Ri]=0+1bi,1+2bi,2++nbi,n [3 marks] i. Define all the terms in this equation. ii. Let rf denote the risk-free rate of interest. Construct a risk-free portfolio to prove that 0=rf. [5 marks] iii. Assume the risk-free rate is 7.5%. Consider a two-factor model (i.e. n=2 ) and two well-diversified portfolios (P1 and P2) with the following features: Determine the values of 1 and 2. [6 marks] (b) Consider a discrete time market with one risky asset and one risk-free asset. The interest rate =41 is fixed and the share prices at times 0,1,2 are defined by S0=8,S1=S0Y1,S2=S1Y2 where Y,Y1 and Y2 are iid random variables with P(Y=23)+P(Y=21)=1 Write down the two time period binomial tree and find the arbitrage-free time 0 option price of the option claim C=(S28)+. [11 marks] Total: 25 marks (a) In a market in which the Arbitrage Pricing Theory (APT) model holds, the expected return is given by E[Ri]=0+1bi,1+2bi,2++nbi,n [3 marks] i. Define all the terms in this equation. ii. Let rf denote the risk-free rate of interest. Construct a risk-free portfolio to prove that 0=rf. [5 marks] iii. Assume the risk-free rate is 7.5%. Consider a two-factor model (i.e. n=2 ) and two well-diversified portfolios (P1 and P2) with the following features: Determine the values of 1 and 2. [6 marks] (b) Consider a discrete time market with one risky asset and one risk-free asset. The interest rate =41 is fixed and the share prices at times 0,1,2 are defined by S0=8,S1=S0Y1,S2=S1Y2 where Y,Y1 and Y2 are iid random variables with P(Y=23)+P(Y=21)=1 Write down the two time period binomial tree and find the arbitrage-free time 0 option price of the option claim C=(S28)+. [11 marks] Total: 25 marks