The SML relationship states that the expected risk premium on a security in a one-factor model must be directly proportional to the security's beta. Suppose that this were not the case. For exam ple, suppose that expected return rises more than proportionately with beta as in the figure below. 9. E(r) a. How could you construct an arbitrage portfolio? (Hint: Consider combinations of portfolios A and B, and compare the resultant portfolio to C.) b. Some re searchers have examined the relationship between average returns on diversified portfolios and the B and p2 of those portfolios. What should they have discovered about the effect of B2 on portfolio return? The SML relationship states that the expected risk premium on a security in a one-factor model must be directly proportional to the security's beta. Suppose that this were not the case. For exam ple, suppose that expected return rises more than proportionately with beta as in the figure below. 9. E(r) a. How could you construct an arbitrage portfolio? (Hint: Consider combinations of portfolios A and B, and compare the resultant portfolio to C.) b. Some re searchers have examined the relationship between average returns on diversified portfolios and the B and p2 of those portfolios. What should they have discovered about the effect of B2 on portfolio return