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And referring to the result of above illustrate the

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_i1b_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

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