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An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free asset that returns 3%.
An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free asset that returns 3%. The investor thinks that the returns on these portfolios can be described by a two factor model, as follows:
WhereF1andF2are factors that affect portfolio returns. Their expected value is zero.Is it possible for this investor to construct an arbitrage portfolio and if so, then how?
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