Consider an APT world with two systematic risks: Market risk and Interest Rate risk. Which of the following statements MUST be TRUE about factor portfolios in this setting:

[I] The market risk factor portfolio contains all the systematic risk in this world.

[II] The market risk factor portfolio is sensitive only to changes in market risk.

[III] The interest rate risk factor portfolio is sensitive only to changes in interest rate risk.

I only

II only

III only

II and III only

I, II, and III

Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at the risk-free rate r_f of 3%. Portfolio (A) is well-diversified with the risk-return profile below. If an investor wants to profit $10,000 from a net-zero portfolio, constructed with Portfolio A, IR portfolio, and the risk-free rate. How much does he need to borrow/lend at the risk-free rate?

		E(R)-rf
Portfolio (A)	1.2	8%
Interest Rate Risk Factor Portfolio	1.0	6%

		Borrow $55,556
		Lend $55,556
		Borrow $250,000
		Lend $250,000
		None of the above