Question: specific risk can be eliminated through diversification & that the return model can be written: a. plot the three assets b. using assets A &

specific risk can be eliminated through diversification & that the return model can be written: a. plot the three assets b. using assets A & B, construct a portfolio with no systematic risk. do the same using assets B & C c. construct an arbitrage portfolio & compute its expected return

b (B) (r) 0.5 0.07 1.0 0.09 1.5 0.17 Assume that the specific risk can be eliminated through diversification and that the return model can be written: In other words, we assume that firm specific risk could be diversified away. a. Plot the three assets on a E(ri bi graph. b. Using assets A and B, construct a portfolio with no systematic risk. Do the same using assets B and C. c. Construct an arbitrage portfolio and compute its expected return

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