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Arbitrage pricing theory (APT) Briefly explain these equations in the context of arbitrage portfolio Explain the three conditions (equations) that define an arbitrage portfolio. X1

Arbitrage pricing theory (APT) Briefly explain these equations in the context of arbitrage portfolio

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Explain the three conditions (equations) that define an arbitrage portfolio. X1 + X2 + X3 = 0 b1X1 + b2X2 + b3X3 = 0 (no additional investment) (zero factor exposures) 7 X1 + 7 X2 + 73 X3 > 0 (positive profit)

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