Assume that all securities in the market follow a single index model. Consider well diversified portfolio A with E(rA)=12% and A =1.0 and a portfolio B with E(rB)=26% and B =1.5. Portfolio B has a portfolio specific risk. Do you have an arbitrage strategy in this market if risk free return is 2%. Why?

a.

Yes, because slopes of portfolios are the same

b.

No, because investors are risk averse

c.

Yes, because slopes of portfolios are different

d.

No, because portfolio B is not well diversified

e.

No, because slopes of portfolios are different