7. Assume that security returns are generated by a one-factor model. Hap Morse holds a portfolio whose component securities have the following characteristics:

Specify an arbitrage portfolio in which Hap might invest. (Remember that there are an infinite number of possibilities; choose one.) Demonstrate that this portfolio satisfies the conditions of an arbitrage portfolio.

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Security Factor Sensitivity Proportion .60 .40 Expected Return 12% B .30 .30 15 C 1.20 .30 8