1) Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor. The expected return of A is RA=11% and the expected return of B is RB=17%. Assume a risk free rate of Rf=6%. Assume RedOne M. wants to take advantage of any arbitrage opportunity and is willing to take a short position of $100,000. He approaches you to help him figuring out whether there is an arbitrage opportunity or not? If yes, exhibit it and calculate RedOnes dollar return?

2)

Suppose you have an economy with only two risky assets X and Y. You are given the following information:

Security	E(R)	Sigma	COV (X,Y)
X	9.168%	0.096	-0.00905
Y	12%	0.10

Suppose you have a risk-free asset (T-bill) that pays 5% and that the proportions to invest in each risky security to form the optimal portfolio (P*) [in other words, the portfolio forming the tangency point between the CAL with highest slope and the efficient frontier are: w*x=0.5075 and w*y=0.4925. If you want to achieve a rate of return 14% using P* and the T-bill, how much will you invest in each?

3 )On January 1, 2004, ChigaBiga Fund an all-equity mutual fund was established. At that time, funds collected were used to purchase the following securities:

		01/01/2004	31/12/04
securities	#Shares	price	price
A	250000	10.75	11.55
B	150000	15.75	14.25
C	210000	32.25	32.5

ChigaBiga issued 5 million shares (or units) to investors. What is the NAV in January 2004?