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Consider the following data for a one-factor economy. All portfolios are well diversified: Portfolio E[r] Beta A 12% 1.2 B 6% 0 Suppose that another

Consider the following data for a one-factor economy. All portfolios are well diversified:

Portfolio E[r] Beta

A 12% 1.2

B 6% 0

Suppose that another portfolio, Portfolio E, is well diversified with a beta of .6 and expected return of 8%. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy? (Identify securities, your positions in them, and quantities you buy and/or short and show that you earn riskless, positive profit.)

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