Suppose there are three stocks A, B, and C. There are only two states of the world. In each of the two states, our three stocks have the following payoffs:

Stock Price (Payoff in State I) (Payoff in State II)

A 60 50 100

B 80 30 120

C 70 38 112

(a) Show that there exists an arbitrage opportunity between these stocks. (Try combining stocks A and B to make a portfolio that is identical to stock C in both states)

(b) Based on your answer in part (a), tell me the zero investment portfolio that would get you positive profit