The returns on the well diversified portfolios A, B and C are explained by the following two-factor APT model. r_A = 0.10 + 4F_1 + F_2 r_B = 0.08 + 3F_1 + F_2 r_C = 0.05 + F_1 + 2F_2 a) Is there an arbitrage opportunity available if the risk-free rate is 4%? Explain your answer. b) Portfolio D is also available for investment with the following 2-factor equation: r_D = 0.10 + 1F_1 + 3F_2. Determine whether the arbitrage opportunity exists. If so, describe how you would use it. c) The 2-factor model for Security X has the following form: r_X = 0.03 + F_1 - 4F_2 + epsilon_X Each of the factors has a variance of 0.01 and residual (firm-specific) variance is equal to 0.03. Compute the factor risk (systematic risk) and total risk for Security X. The returns on the well diversified portfolios A, B and C are explained by the following two-factor APT model. r_A = 0.10 + 4F_1 + F_2 r_B = 0.08 + 3F_1 + F_2 r_C = 0.05 + F_1 + 2F_2 a) Is there an arbitrage opportunity available if the risk-free rate is 4%? Explain your answer. b) Portfolio D is also available for investment with the following 2-factor equation: r_D = 0.10 + 1F_1 + 3F_2. Determine whether the arbitrage opportunity exists. If so, describe how you would use it. c) The 2-factor model for Security X has the following form: r_X = 0.03 + F_1 - 4F_2 + epsilon_X Each of the factors has a variance of 0.01 and residual (firm-specific) variance is equal to 0.03. Compute the factor risk (systematic risk) and total risk for Security X