You have a well-diversified portfolio P. You believe that the return of P is exposed to 3 systematic risk factors, market risk (M) and exchange rate risk (X) and Inflation risk (I). The sensitivity of Ps return to M is 1.2, to X is 0.7 and to I is 0.5. You have estimated the expected excess return of portfolios that mimic these 3 risk factors are 7%, 3% and 2% respectively. According to APT, how much excess return should you expect on portfolio P?

Your analysis shows that Ps expected excess return is 12%. Is P correctly priced, overpriced or underpriced?

How much is Ps alpha? Is there any arbitrage opportunity?