Investors attribute all securities' systematic risks to two factors, F1 and F2. Suppose portfolios A, B, and C are well-diversified. The risk free rate of return is 7%. [Note: E(R) represent risk premium] Portfolio Portfolio B 0 B1 B2 E(R) Portfolio C 1.5 0 .5 3% 1 0 1% 7% Is there an arbitrage opportunity? If so, how to construct the zero investment arbitrage portfolio and what is the risk free profit? There is no arbitrage opportunity There is an arbitrage opportunity. The arbitrage portfolio has 100% on portfolio C, -150% on portfolio A, -50% on portfolio B, and 100% on risk-free asset. The risk-free return is -2%. There is an arbitrage opportunity. The arbitrage portfolio has -100% on portfolio C, 150% on portfolio A, 50% on portfolio B, and 50% on risk-free asset. The risk-free return is 2%. There is an arbitrage opportunity. The arbitrage portfolio has -100% on portfolio C, 150% on portfolio A, 50% on portfolio B, and -100% on risk-free asset. The risk-free return is 2%. Investors attribute all securities' systematic risks to two factors, F1 and F2. Suppose portfolios A, B, and C are well-diversified. The risk free rate of return is 7%. [Note: E(R) represent risk premium] Portfolio Portfolio B 0 B1 B2 E(R) Portfolio C 1.5 0 .5 3% 1 0 1% 7% Is there an arbitrage opportunity? If so, how to construct the zero investment arbitrage portfolio and what is the risk free profit? There is no arbitrage opportunity There is an arbitrage opportunity. The arbitrage portfolio has 100% on portfolio C, -150% on portfolio A, -50% on portfolio B, and 100% on risk-free asset. The risk-free return is -2%. There is an arbitrage opportunity. The arbitrage portfolio has -100% on portfolio C, 150% on portfolio A, 50% on portfolio B, and 50% on risk-free asset. The risk-free return is 2%. There is an arbitrage opportunity. The arbitrage portfolio has -100% on portfolio C, 150% on portfolio A, 50% on portfolio B, and -100% on risk-free asset. The risk-free return is 2%