4. Suppose that the rate of return on risky assets is given by the following...
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4. Suppose that the rate of return on risky assets is given by the following single factor model where F is the factor affecting returns on all securities and e is a firm-specific dis- turbance. The risk-free rate is 4% and borrowing at this rate is possible. Two well- diversified portfolios P and Q are found to have the following expected returns and betas: E(rp) 12% P-0.8 (a) Explain why these data are inconsistent with Arbitrage Pricing Theory (b) Construct a zero investment portfolio that yields a sure profit and does not involve borrowing. What are the weights of P and Q in your portfolio? Are you investing in bills
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