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You are presented with the following information regarding Portfolios X, Y, and Z: a. Which of Portfolio X and Y would you choose if you

You are presented with the following information regarding Portfolios X, Y, and Z:

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a. Which of Portfolio X and Y would you choose if you could only invest in one of the two? Explain your answer.

b. Assume Portfolio Y is simply an 80%/20% combination of the market portfolio and the risk free portfolio. What is the expected alpha of Portfolio X?

c. Construct an arbitrage that exploits the result you arrived at in part b.

beta 1.6 Portfolio X Portfolio Y Portfolio Z ED) 12% 8% 3% g .25 .18 .00 0.8 0.0

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