11.7 Assume that the following market model adequately describes the return-generating behavior of risky assets.

RMt and it are statistically independent.
Suppose the following data are true.

a. Calculate the standard deviation of returns for each asset.

b. Assume short selling is allowed.
i. Calculate the variance of return of three portfolios containing an infinite number of asset types A, B, or C, respectively.
ii. Assume: RF = 3.3% and . Which asset will not be held by rationalinvestors?
iii. What equilibrium state will emerge such that no arbitrage opportunities exist? Why?

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where and = Rita + BRM + it R = The return for the ith asset at time t it RMI = The return on a portfolio containing all risky assets in some proportion, at time t