And referring to the result of above illustrate the

Question

Modern Portfolio Theory and Investment Analysis ch16. practice problem.

Assume that the following two-index model describes returns: R_i = a_i +b_i1I₁ +b_i2I₂ + e_i

Assume that the following three portfolios are observed

portfolio     Expected Return       b_i1          b_i2

A                    12                      1.0           1

B                     13                     1.5            2

C                     17                     0.5           -3

Find the equation of the plane that must describe equilibrium returns.

And Referring to the result of above, illustrate the arbitrage opportunities that would exist if a portfolio called D with the following characteristics were observed:

R(bar)_D =15      b_D1 =1       b_D2  = 0