Question: We believe that the single factor model r = E(ri) + BF+, where E(i) = 0 and Cov(F, i) = 0 can predict any

We believe that the single factor model r = E(ri) + BF+, where E(i) = 0 and Cov(F, i) = 0 can predict any individual asset's realized rate of return well. Both Portfolio A and Portfolio B are well-diversified A B B 1.2 0.8 E(r) 0.1 0.08 (a) What is the rate of return of the risk-free asset? (b) What is the expected rate of return of the well-diversified portfolio C with Bc = 1.6, which also exists in the market? (c) A fund constructs a well-diversified portfolio D. Studies show that p=0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?

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