Please answer all three parts

2) (11 marks) The returns on the well diversified portfolios A, B and C are explained by the following two-factor APT model. ra = 0.10+4F +F, IB = 0.08+37 +F, rc = 0.05+F; +2F2 a) Is there an arbitrage opportunity available if the risk-free rate is 4%? Explain your an- swer. (4 marks) b) Portfolio D is also available for investment with the following 2-factor equation: ro=0.10+1F +3F2. Determine whether the arbitrage opportunity exists. If so, de- scribe how you would use it. (3 marks) c) The 2-factor model for Security X has the following form: rx=0.03+F-4F,+Ex Each of the factors has a variance of 0.01 and residual (firm-specific) variance is equal to 0.03. Compute the factor risk (systematic risk) and total risk for Security X. (4 marks) 2) (11 marks) The returns on the well diversified portfolios A, B and C are explained by the following two-factor APT model. ra = 0.10+4F +F, IB = 0.08+37 +F, rc = 0.05+F; +2F2 a) Is there an arbitrage opportunity available if the risk-free rate is 4%? Explain your an- swer. (4 marks) b) Portfolio D is also available for investment with the following 2-factor equation: ro=0.10+1F +3F2. Determine whether the arbitrage opportunity exists. If so, de- scribe how you would use it. (3 marks) c) The 2-factor model for Security X has the following form: rx=0.03+F-4F,+Ex Each of the factors has a variance of 0.01 and residual (firm-specific) variance is equal to 0.03. Compute the factor risk (systematic risk) and total risk for Security X. (4 marks)