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6. You have the following information for three portfolios in a two-factor economy: (10 marks] Asset Expected Return (%) Beta on Factor 1 Beta on
6. You have the following information for three portfolios in a two-factor economy: (10 marks] Asset Expected Return (%) Beta on Factor 1 Beta on Factor 2 Portfolio A 15 1.4 1.1 Portfolio B 12 1.2 0.9 Portfolio C 18 1.0 0 There is a risk-free asset with a return of 2%. a) Is there an arbitrage opportunity? [2m] b) How can investors take advantage of it? [6m] What would be the risk-free arbitrage profit, in % term? [2m] 6. You have the following information for three portfolios in a two-factor economy: (10 marks] Asset Expected Return (%) Beta on Factor 1 Beta on Factor 2 Portfolio A 15 1.4 1.1 Portfolio B 12 1.2 0.9 Portfolio C 18 1.0 0 There is a risk-free asset with a return of 2%. a) Is there an arbitrage opportunity? [2m] b) How can investors take advantage of it? [6m] What would be the risk-free arbitrage profit, in % term? [2m]
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