The Information below presents the expected returns and betas for five investment funds.

Funds: Expected Returns Beta

Index Fund 10.0% 1

Value Fund 14% 1.50

Growth Fund 12.5% 1.25

Small Cap 15% 1.75

Large Cap 8% 0.75

a. Using the Large Cap fund and the Small Cap fund, solve for the allocations needed to create a zero-market risk portfolio. What is the rate of return for that portfolio?(Hint: p = w11 + w22, where w2 = (1-w1)).

b. Using the Large Cap fund and the Small Cap fund, solve for the allocations needed to create portfolio with a beta of one. What is the rate of return for that portfolio? ?(Hint: p = w11 + w22, where w2 = (1-w1))

C. Determine whether the Index, Value, and Growth funds have return and beta combinations above or below the line you generated. Explain the arbitrage strategy you would form with each of these funds. What conclusions do you draw?