Question: 1. We believe that the single factor model ri = ]E(r.) + iF + ehwhere E(e.~) = 0 and Cov(F,z') = 0 can predict any

1. We believe that the single factor model ri = ]E(r.) + iF + ehwhere E(e.~) = 0 and Cov(F,z') = 0 can predict any individual asset's realized rate of return well. Both Portfolio A and Portfolio B are well-diversied E(r) 0.1 0.03 (a) What is the rate of return of the risk-free asset? (b) What is the expected rate of return of the well-diversied portfolio 0 with 50 = 1.6, which also exists in the market? (c) A fund constructs a well~diversied portfolio D. Studies show that 50 = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn prots with no risk. If not, why

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