Consider the following information on the estimated factor loadings for a two-factor APT model for three well-diversified portfolios.

Beta1Beta2E(r)

Port A 1.5.3.19

Port B .5.5.13

Port C.21.0.14

The risk-free rate is 1% per annum.Beta1 is the factor loading on Factor 1 and Beta2 is the factor loading for factor 2; E(r) denotes the expected return.

Assume there are no transactions costs and that you can short the portfolios and borrow and lend at the risk-free rate (you can obviously go long in the portfolios too).

A. Is there an arbitrage opportunity with these three well-diversified portfolios (and the risk-free rate)?For this question, justify your answer by showing the three are not priced correctly relative to each other.(9 points)