Consider the following data for a one$-$factor economy. All portfolios are well diversified.

Suppose that another portfolio, portfolio $E,$ is well diversified with a beta of $0\mathrm{.}6$ and expected

return of $8\%.$ Would an arbitrage opportunity exist? If so$,$ what would be the arbitrage

strategy?

A portfolio manager summarizes the input from the macro and micro forecasters in the

following table:

a$.$ Calculate the expected excess returns, alpha values, and residual variances for these

securities$.$

b$.$ Construct the optimal risky portfolio by using the procedure we covered in class.

c$.$ Calculate the Sharpe ratio for the optimal portfolio and state how much of it is due to the

active portfolio.