Question: Consider the two factor APT. A diversified portfolio has a beta of 0.5 on the inflation factor and a beta of 1 on the GDP

Consider the two factor APT. A diversified portfolio has a beta of 0.5 on the inflation factor and a beta of 1 on the GDP factors. The risk premiums on the inflation and the GDP factors are 2% and 3% respectively. The risk-free rate of return is 6%. What is the expected return on this portfolio if no arbitrage opportunities exist? a)10% b) 9.5% c) 9% d) 7% e) 6%

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