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Consider the following data for a one factor economy . All portfolios are well diversified. Portfolio E ( r ) Beta A10% 0.8 B12% 1.0

Consider the following data for a one factor economy . All portfolios are well diversified.
PortfolioE(r) Beta
A10% 0.8
B12% 1.0
(a)What is the SML in this economy, if bothAandBare fairly priced?
(b)Suppose that another well-diversified portfolio C with a beta of 1.2 and expected return of 14%. Would an arbitrage opportunity exist? If so, what would be an example of the arbitrage strategy?

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