(Parts a, b and c are independent. No information from one should be assumed for the other.)

1. (a)Suppose there are three types of people in an economy, A, B and C. There are also three assets X, Y and Z. Assets X and Y are risky but asset Z is risk free. A' hold 45 percent of their portfolios in X, 30 percent in Y and 25 percent in Z. Type B's hold 30 percent of their portfolios in X, 20 percent in Y and 50 percent in Z. Type C's hold 15 percent in X, 10 percent in Y and 75 percent in Z. Are these holdings consistent with the Capital Asset Pricing Model being satisfied? Explain briefly why or why not.
2. (b)Suppose that the Capital Asset Pricing Model holds. The market portfolio has an expected return of 0.14 and a standard deviation of 0.35. The risk free rate is 0.05. How could you construct a portfolio having an expected return of 0.20? What are the beta and standard deviation of this portfolio?
3. (c)You have discovered three portfolios with the following characteristics. (SEE BELOW)

Investment: A,B, C

Expected Return: 6 percent (a), 15 percent (b), 18 percent (c)

Beta: 0 (a), 1 (b), 1.5 (c)

Unique Risk none none none

Plot expected returns against betas for these three portfolios.

1. (i)Do they all lie on the security market line and is there an arbitrage opportunity available?
2. (ii)Give a zero-investment, zero-risk portfolio with positive expected return that has either +$1 or -$1 invested in C.
3. (iii)What is the expected return on the portfolio in (iii)?