1.

Which of the following statement(s) about a well-diversified portfolio must be CORRECT?

[I]: It is diversified over a large enough number of assets so that the non-systematic variance is essentially zero.

[II]: It has a CAPM beta of 1.

[III]: Its expected return is the risk-free rate.

Select one:

a. [I] and [III] only.

b. [I] only.

c. [I] and [II] only.

d. [II] only.

e. [III] only.

2.

Consider the single factor APT, portfolio A has a beta of 0.8 and an expected return of 13% while portfolio B has a beta of 1.2 and an expected return of 15%. Both portfolios are well-diversified. The risk-free rate of return is 5%. If you wanted to take advantage of an arbitrage opportunity, what should you do?

Select one:

a. Margin trading on A.

b. Short A and long B.

c. Long A and short B.

d. No arbitrage opportunity exists.

e. Short selling A.