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

(b) What is the expected rate of return of the well-diversified portfolio C with C =1.6, which also exists in the market?

(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?

1. We believe that the single factor model ri= E(ri) + B;F + i, where E(ei) = 0 and Cov(F, i) = 0 can predict any individual asset's realized rate of return well. Both Portfolio A and Portfolio B are well-diversified B 0.8 B 1.2 E(r) 0.1 0.08 (a) What is the rate of return of the risk-free asset? (b) What is the expected rate of return of the well-diversified portfolio C with Bc = 1.6, which also exists in the market? (c) A fund constructs a well-diversified portfolio D. Studies show that Bp = 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? 1. We believe that the single factor model ri= E(ri) + B;F + i, where E(ei) = 0 and Cov(F, i) = 0 can predict any individual asset's realized rate of return well. Both Portfolio A and Portfolio B are well-diversified B 0.8 B 1.2 E(r) 0.1 0.08 (a) What is the rate of return of the risk-free asset? (b) What is the expected rate of return of the well-diversified portfolio C with Bc = 1.6, which also exists in the market? (c) A fund constructs a well-diversified portfolio D. Studies show that Bp = 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