ECN226 (2021) Page 5 Question 6 for a one-factor economy. Both portfolios are a) Consider the following data in Table well diversified. Table 2 Portfolio Beta Expected return EO) A 13% 0.2 B 15% 0.4 The risk-free rate of return is 10%. Is there an arbitrage opportunity in this market? If so, explain your arbitrage strategy. Explain if you agree with those claiming that rational investors will pursue arbitrage opportunities consistent with their risk tolerance. [7 marks] b) When applying the Fama and French Three-factor model, we find that small size companies generally have relatively high betas on the SMB (Small Minus Big) factor. Explain. [7 marks]