Q1: Explain the advantages of the indexing portfolio strategy in managing portfolios. (5 marks)

Q2: Assuming that you are a fund manager and would like to arbitrage between 3 stocks to minimise risk and earn profit without incurring any investment. The three (3) stocks namely (Padini, May Bank and Proton Bhd) responded to two (2) common risk factors Exchange Rate (EX.) and inflation (INF). The relationships for the three stocks are modelled as follow:

ii)If the rate of return on a zero-systematic risk asset (g) _ 3%, EX (1) = 4% and INF (24) = 6%. what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for RMS and will pay RMO.5 dividend in the next year. iii) supposed that you know that next year prices for the three stocks Padini, May Bank and Proton Bhd. will actually be RM8.50, RM8.3 and RM8.7, respectively. Create and demonstrate a riskless, arbitrage investment to take advantage of these misprices securities. What is the profit from your investment? Note that you may assume that you can use the proceeds from any necessary short sale.