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1. Consider the following data for a one-factor economy. All portfolios are well diversified. Portfolio E(r) Beta A 16% 1.6 F 8% 0.0 Suppose that

1. Consider the following data for a one-factor economy. All portfolios are well diversified.

Portfolio

E(r)

Beta

A

16%

1.6

F

8%

0.0

Suppose that another portfolio, portfolio E, is well diversified with a beta of .4 and expected return of 9%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy?

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