The expected returns and estimated betas of four portfolios are as follow:

Portfolios	Expected return	bi1	bi2
A	10	0.3	0.2
B	14	0.5	1.0
C	15	1.0	0.6
D	15	0.6	0.6

Required:

a. What is arbitrage? (2 marks)

b. There is an arbitrage opportunity. Process this arbitrage and calculate the arbitrage return. (5 marks) (Hints: consider to structure a new portfolio with other portfolios)

c. If the maximum value allowed in short is $2 million, what is the possible maximum profit to be earned in the arbitrage? (2 marks)