Data:

Risk & Return: Q=1.25; rf=2%; and RM=12%.

Cash Flows: g=5% and is constant; the last dividend paid was D0=$2.00

1. Combine M and F so that its beta is identical to Q. Show the level of return.

Call this combination portfolio P

2. Find the level of arbitrage return from buying P and selling Q

3. Is there a relationship between Jensens Alpha and the arbitrage level of return? Explain. Note: Responding only yes or no is insufficient