You have estimated the following two-factor structure for three well diversified portfolios (labelled A, B and C). ra = a A + 011 + 012 rB= ab + 211 + 112 rc=ac + 311 + 412 The expected returns on portfolios A, B, and C have been estimated to be 10%, 15% and 20% (the expected factor realisations, E(11) and E(12) are nil]. Required: (a) Solve for the APT pricing equation and interpret your result. (12 marks) (b) Now there is a new asset D, which has exposures of 5 and 2 to factors 1 and 2 respectively. What is its no arbitrage expected return? (8 marks) (Total 20 marks) You have estimated the following two-factor structure for three well diversified portfolios (labelled A, B and C). ra = a A + 011 + 012 rB= ab + 211 + 112 rc=ac + 311 + 412 The expected returns on portfolios A, B, and C have been estimated to be 10%, 15% and 20% (the expected factor realisations, E(11) and E(12) are nil]. Required: (a) Solve for the APT pricing equation and interpret your result. (12 marks) (b) Now there is a new asset D, which has exposures of 5 and 2 to factors 1 and 2 respectively. What is its no arbitrage expected return? (8 marks) (Total 20 marks)