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2) (20 points) Portfolios A and B are two well-diversified portfolios. Portfolio A has an alpha of 3% and beta of 1.3 while Portfolio B

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2) (20 points) Portfolios A and B are two well-diversified portfolios. Portfolio A has an alpha of 3% and beta of 1.3 while Portfolio B has an alpha of 1%. Using Arbitrage Pricing Theory, answer the following questions: a) If there are no arbitrage opportunities, what is the beta of portfolio B? b) Now depending on your choice, assign a beta to portfolio B, which is not equal to the beta that you calculated in part a). Then show that there is an arbitrage opportunity and define your arbitrage strategy. 2) (20 points) Portfolios A and B are two well-diversified portfolios. Portfolio A has an alpha of 3% and beta of 1.3 while Portfolio B has an alpha of 1%. Using Arbitrage Pricing Theory, answer the following questions: a) If there are no arbitrage opportunities, what is the beta of portfolio B? b) Now depending on your choice, assign a beta to portfolio B, which is not equal to the beta that you calculated in part a). Then show that there is an arbitrage opportunity and define your arbitrage strategy

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