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Assume the following two-index model describes returns: R = a +b, 7, +b /, + e, And assume the following three portfolios are observed. Portfolio
Assume the following two-index model describes returns: R = a +b, 7, +b /, + e, And assume the following three portfolios are observed. Portfolio Expected Return bil 12.0 1.0 B 13.0 1.5 17.0 biz 1 2 -3 0.5 Find the equation of the plane that must describe equilibrium returns. Referring to the results of Problem 3, illustrate the arbitrage opportunities that would exist if a portfolio called D with the following characteristics were observed: R, =15, bp=1 bp2 = 0
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