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Suppose an investor just found an arbitrage opportunity and she took actions right away. She shorted the overpriced portfolio and used all the proceeds to
Suppose an investor just found an arbitrage opportunity and she took actions right away. She shorted the overpriced portfolio and used all the proceeds to long the underpriced portfolio that has the same risk exposure as the overpriced portfolio. Help her understand why the expected return of the overpriced portfolio will increase while the expected return of the underpriced portfolio will decrease after she started the arbitrage. When will these changes stop? (6 points)
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