Below is the information for Example 3 in notes N9 on page 21.This table indicates the expected returns (E(r)) and the factor sensitivities (denoted Beta1 and Beta2) for two factors for four portfolios.

Beta1Beta2E(r)

Port A 1.5.6.20

Port B .5.5.095

Port C0 0 .02

Port D.21.0.13

Questions:

a.What factor risk premia are consistent with Arbitrage Pricing Theory for the first three portfolios?

b.Given these factor risk premia, Is the expected return for Portfolio D in the table consistent with the factor risk premia implied by portfolios A, B, and C?