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The risk free rate is 3% and there are two well-diversified portfolios, A and B with the following properties: a) Find the price of risk

The risk free rate is 3% and there are two well-diversified portfolios, A and B with the following properties:

a) Find the price of risk for each factor under no arbitrage.

b) suppose there is a portfolio C with factor loading(B_c1, B_c2) =(0.5, 0.5) and expected return E(r_c)=7% is there an arbitrage opportunity? If yes, explain how to exploit the arbitrage ?

Portfolio B B A 1 0.5 B 2 0.2 E[r] 7.5% 13.4%

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