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 15% 14% Sensitivity to Factor X 1.5 1 Sensitivity to Factor Y 0.5 1 0 7% 0.5 a. Consider another well-diversified portfolio D. Portfolio D's sensitivity to Factor X is 2 and its sensitivity to Factor Y is 1. Calculate Portfolio D's APT-consistent expected return (4 marks) b. Suppose that Portfolio D's expected return is 18% instead. How would you exploit the arbitrage opportunity? In other words, design an arbitrage portfolio consisting of portfolios A, B, C, and D. Assume that portfolios A, B, C, and D are well diversified to the extent that their idiosyncratic risks are negligible, and that portfolios A, B, C, and D can be bought on margin or sold short. 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 15% 14% Sensitivity to Factor X 1.5 1 Sensitivity to Factor Y 0.5 1 0 7% 0.5 a. Consider another well-diversified portfolio D. Portfolio D's sensitivity to Factor X is 2 and its sensitivity to Factor Y is 1. Calculate Portfolio D's APT-consistent expected return (4 marks) b. Suppose that Portfolio D's expected return is 18% instead. How would you exploit the arbitrage opportunity? In other words, design an arbitrage portfolio consisting of portfolios A, B, C, and D. Assume that portfolios A, B, C, and D are well diversified to the extent that their idiosyncratic risks are negligible, and that portfolios A, B, C, and D can be bought on margin or sold short