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Consider a one-factor economy. Portfolio A has a beta of 1.33 on the factor, and portfolio B has a beta of 1.77 on the factor.

Consider a one-factor economy. Portfolio A has a beta of 1.33 on the factor, and portfolio B has a beta of 1.77 on the factor. The expected returns on portfolios A and B are 12% and 17.5%, respectively. Assume that the risk-free rate is 2.5%, and an arbitrage opportunities exist. Suppose you invested $400,000 in portfolio B, and sold short $400,000 of portfolio A. What would be your expected profit from this strategy?

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