a	b
	1.2	0.8
E(r)	0.1	0.08

1. We believe that the single factor model ri =E(ri)+iF+i, where E(i)=0and Cov(F,i)=0

can predict any individual assets realized rate of return well. Both Portfolio A and Portfolio B are well-diversified

1. (a) What is the rate of return of the risk-free asset?

2. (b) What is the expected rate of return of the well-diversified portfolio C with C =

   1.6, which also exists in the market?

3. (c) A fund constructs a well-diversified portfolio D. Studies show that D = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?