Question: Q6) (12 points: 4+4+4) Consider the following multifactor APT model for a well-diversied portfolio, A : Em Factor beta WM Ination 1.2 _____ GDP 0.6

Q6) (12 points: 4+4+4) Consider the following multifactor APT model for a well-diversied portfolio, A : Em Factor beta WM Ination 1.2 _____ GDP 0.6 14% Oil prices 0.2 9% Assume the riskfree rate is 6%. a) If the expected return on portfolio A is 17%, what is the expected return on the factor portfolio for Ination? b) Assume the realized return on portfolio A turned out to be 18%. Ifthe expectations were fully realized with respect to GDP and oil prices, by how much were they off with respect to ination? c) Assume portfolio A is underpriced and you have $1 million to do arbitrage. How would you create your arbitrage portfolio, Al , i.e. what are the components of A1, how many dollars would you invest in each component, and what positions would you take with A and A1

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