Question: 17 10 2 Marks Assume that the single index model holds for all securities and an investor comes up with the following equation for the

10 2 Marks Assume that the single index model holds for all securities and an investor comes up with the following equation for the return of a well diversified portfolio P: rp = 19% +1.2RM where RM is an excess return on the market. The risk free rate is 2% and the expected return on the market is 13%. (10 points) a. Does APT hold for portfolio P, and why? b. Does an arbitrage opportunity exist in this economy? If so, construct an arbitrage strategy c. Now suppose that portfolio P is not well-diversified so that rp = 19% +1.2RM + ep where e, is the unexpected firm-specific risk for the portfolio P. Does an arbitrage opportunity exist in this market? Why? If so, construct an arbitrage strategy

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