Business, 21.04.2020 03:28 nunuskies

Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data:

Security βi E(Ri) σ(ei)
A 0.6 7 % 16 %
B 0.9 10 7
C 1.2 13 10

a. If σM = 22%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.)
b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C?
c. Is there an arbitrage opportunity in this market? What is it? Analyze the opportunity graphically.

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Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri i...

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