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Suppose Rf = 6% and a well diversified portfolio P has a beta of 1.3 and an alpha of 2% when regressed against a systematic

Suppose Rf = 6% and a well diversified portfolio P has a beta of 1.3 and an alpha of 2% when regressed against a systematic factor S. Another well diversified portfolio Q has a beta of 0.9 and an alpha of 1%.

a. Using the above information explain if there is any arbitrage opportunity.

b. If there is an arbitrage opportunity, what action would you take to capitalise on this opportunity?

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