From the Chegg solution manual, \'Investments 9th edition by Bodie\'. Shouldn\'t

Question

From the Chegg solution manual, 'Investments 9th edition by Bodie'.

Shouldn't E(Ri) / beta be equal for the securities A, B, and C if there is no arbitrage opportunity? In the solutions manual it is stated that there is no arbitrage opportunity.

Assume that security returns are generated by the single-index model, where Ri is the excess return for securityi 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 | | E(R) | (e i ) A | 0.8 | 10% | 25% B | 1.0 | 12% | 10% C | 1.2 | 14% | 20%

Explanation / Answer

No,  there is no arbitrage opportunity.

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