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Here are some well diversified funds that trade assets on the Winter Wonderland Exchange. Assume a single factor APT correctly prices all securities. Asset

Here are some well diversified funds that trade assets on the Winter Wonderland Exchange. Assume a single factor APT correctly prices all securities. Asset Lancaster Value Fund Flawless Fund Expected Return 12% 2% Factor Beta 2.0 0.0 i) What is the riskless rate? ii) What is the expected return on the factor portfolio? (2 marks) (3 marks) iii) Suppose the Lancaster Growth fund becomes available, with factor beta 0.4, and expected return of 5%. Show clearly that there is an arbitrage opportunity. (9 marks)

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