Suppose that a two-factor (Factor X and Factor Y) model describes the return generating processes of all securities in the market and that the corresponding APT model correctly calculates the expected returns of the three well-diversified portfolios A, B, and C with the following characteristics: Portfolio A B Expected return 13% 17% 9% Sensitivity to Factor X 1 1 0.5 Sensitivity to Factor Y 0 1 0 a) Consider another well-diversified portfolio D. Portfolio D's sensitivity to Factor X is 0.5 and its sensitivity to Factor Y is 1. Calculate Portfolio D's APT-consistent expected return (4 marks) b) Suppose that Portfolio Ds expected return is 10% instead. The risk-free rate is 5%. How would you exploit the arbitrage opportunity? In other words, design an arbitrage strategy consisting of portfolios A, B, D, and the risk-free asset. Assume that portfolios A, B, and D are well diversified to the extent that their idiosyncratic risks are negligible, and that all portfolios and the risk-free asset can be bought on margin or sold short. (6 marks) Suppose that a two-factor (Factor X and Factor Y) model describes the return generating processes of all securities in the market and that the corresponding APT model correctly calculates the expected returns of the three well-diversified portfolios A, B, and C with the following characteristics: Portfolio A B Expected return 13% 17% 9% Sensitivity to Factor X 1 1 0.5 Sensitivity to Factor Y 0 1 0 a) Consider another well-diversified portfolio D. Portfolio D's sensitivity to Factor X is 0.5 and its sensitivity to Factor Y is 1. Calculate Portfolio D's APT-consistent expected return (4 marks) b) Suppose that Portfolio Ds expected return is 10% instead. The risk-free rate is 5%. How would you exploit the arbitrage opportunity? In other words, design an arbitrage strategy consisting of portfolios A, B, D, and the risk-free asset. Assume that portfolios A, B, and D are well diversified to the extent that their idiosyncratic risks are negligible, and that all portfolios and the risk-free asset can be bought on margin or sold short. (6 marks)