Question: Assume that security returns are generated by a one-factor model. Hap Morse holds a portfolio whose component securities have the following characteristics: Specify an arbitrage

Assume that security returns are generated by a one-factor model. Hap Morse holds a whose component securities have the following characteristics:

Specify an arbitrage portfolio in which Hap might invest. (Remember that there are an infinite number of possibilities-choose one.) Demonstrate that this portfolio satisfies the conditions of an arbitrage portfolio.

Factor Sensitivity .6 .3 1.2 Expected Security Return 12% 15 .3 .3

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