Assume that a one-factor model describes returns and that the following two well-diversified portfolios are observed

1. a) Find the equation that must describe APT equilibrium returns

Portfolio	Expected Returns	1 j,b
A	11%	1.8
B	5%	0.6

b) Suppose a portfolio was quoted on the market with the following information

Portfolio	Expected Returns	1 j,b
c	4%	1

Is this an equilibrium return? If not, what arbitrage between A, B, and C would occur?

Hint: Construct a portfolio from A and B that has the same j ,1 b as C). Explain your

answer.