3. Arbitrage! (10 pts) For the following situations say whether an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage? (a) (5 pts) Suppose I have a market with two risk factors. The portfolio representing risk factor 1 has an expected return of 5 percent. The portfolio representing risk factor 2 has an expected return of 8 percent. 3 The risk free rate is 2 percent. Suppose a well diversified portfolio A has the following betas 1=1.5 and 2=0.2 and has an expected return of 1.25 percent. (b) (5 pts) Suppose we have a market comprised of one risk factor. The expected excess return on a well diversified portfolio A is 12.5 percent and it has a a factor =1.2. The expected excess return on a well diversified portfolio B is 3.2 percent and it has a factor =0.3. 3. Arbitrage! (10 pts) For the following situations say whether an arbitrage opportunity exists and if so what is the arbitrage strategy and by what amount are the gains from arbitrage? (a) (5 pts) Suppose I have a market with two risk factors. The portfolio representing risk factor 1 has an expected return of 5 percent. The portfolio representing risk factor 2 has an expected return of 8 percent. 3 The risk free rate is 2 percent. Suppose a well diversified portfolio A has the following betas 1=1.5 and 2=0.2 and has an expected return of 1.25 percent. (b) (5 pts) Suppose we have a market comprised of one risk factor. The expected excess return on a well diversified portfolio A is 12.5 percent and it has a a factor =1.2. The expected excess return on a well diversified portfolio B is 3.2 percent and it has a factor =0.3