Question 1. Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor. The expected return of A is RA=11% and the expected return of B is RB=17%. Assume a risk free rate of Rf=6%. Assume RedOne M. wants to take advantage of any arbitrage opportunity and is willing to take a short position of $100,000. He approaches you to help him figuring out whether there is an arbitrage opportunity or not? If yes, exhibit it and calculate RedOnes dollar return?

Question 4. As a fresh student of MFIN668 you are considering investing your saving in (either): (i) A mutual fund with a 7% front-end load and expense ratio of 1.5% (charged to the value of assets at the year-end) or (ii) T-bills paying 6% interest rate. If the rate of return on the fund is 9.1875%, what should be your investment horizon (i.e. how many years) to be indifferent between investing in the T-bill or the fund (i.e. same payoff for both investment vehicles)