Question: 1. The rRF = 4% and rM = 15%. A portfolio has a = .60. In the market the actual expected return of the portfolio

1. The rRF = 4% and rM = 15%. A portfolio has a = .60. In the market the actual expected return of the portfolio is equal to 12%. Show quantitatively and explain the arbitrage according to APT using two different strategies. What is the APT equilibrium result?

(a) Suppose the strategy to earn exactly the alpha is undertaken, and it turns out rM = 12%. What is the net return of the strategy?

(b) Suppose the strategy to earn exactly the alpha is undertaken, and it turns out rM = -8%. What is the net return of the strategy?

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