Assume the following single-factor model, where M represents the market factor (well-diversified), ERM is the market risk premium, and E[RP] is the excess return on a well-diverisifed portfolio:

ERP=P+PERM=0.02+1.8*ERM

1. Estimate the risk premium on a zero-beta portfolio.
2. Show how one can use this zero-beta portfolio as an arbitrage opportunity.
3. Describe the APT assumptions regarding this arbitrage opportunity.
4. If the market has a risk premium of 6%, what is the risk premium on portfolio P, assuming no arbitrage.