Answer Happy

Assume that security returns are generated by the single-index model, R₁ = ai + BiRM + ei where R¡ is the excess return for security i and RM is the market's excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security A B Security A Security B Security C Bi 1.0 1.3 1.6 E(ri) 10% Security A Security B Security C 13 16 a. If OM= 20%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.) σ (ei) 23% 9 18 Variance b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. If one forms a well-diversified portfolio of type A securities, what will be the mean and variance of the portfolio's excess returns? What about portfolios composed only of type B or C stocks? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.) Mean Variance c. Is there an arbitrage opportunity in this market?