You have a well-diversified portfolio P. You believe that the return of P is exposed to 2 systematic risk factors, marke

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You have a well-diversified portfolio P. You believe that the
return of P is exposed to 2 systematic risk factors, market risk
(M) and exchange rate risk (X). The sensitivity of P’s return to M
is 1.2 and to X is 0.7. You have estimated the expected excess
return of factors M and X are 7% and 3% respectively.
According to APT, how much excess return should you expect on
portfolio P?
12.5%
11.5%
10.5%
13.5%
If your analysis shows that portfolio P’s expected excess return
is 13%, how much is mispricing (α)?
2.5%
-2.5%
1.5%
-1.5%
Let’s assume that there is portfolio PM that has unit
sensitivity to factor M and zero sensitivity to factor X. Its
expected excess return is 7%. Let’s also assume that there is
portfolio PX that has unit sensitivity to factor X and zero
sensitivity to factor M. Its expected excess return is 3%. I
combine P, PM, PX and risk-free with weights 1, -1.2, -0.7 and 0.9
respectively, and make portfolio A. Which statement is FALSE about
A?
A is a zero initial investment portfolio.
A has 0 sesitivity (beta) to factor M.
A has 0% expected return.
A is an arbitrage portfolio.