(a) If the CAPM is true, what must be the expected return on a portfolio with zero-beta? Consider the following scenario: The risk-free rate is 2%. There are two securities, X and Y . X has a beta of 1.2, and expected return of 10%. Y has a beta of .4. (b) What is the return to the market if the CAPM is true? (c) Now suppose the return to security Y is 1%. Is this return for Y consistent with the CAPM being true? Explain your answer. (d) Using the information in (a)-(c), can you construct a zero-beta portfolio? Does this constitute an arbitrage strategy? Explain your answer. Recall that arbitrage is a strategy that requires zero money up front (your longs/shorts or buys/sells cancel out), that generates a return greater than zero.