Determine whether or not an arbitrage opportunity exists

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Reference no: EM132741844

Assume that the following one-factor macroeconomic model describes the expected return for portfolios:

Also assume that all investors agree on the expected returns and factor sensitivity of the three highly diversified Portfolios A, B, and C given in the following table:

Portfolio Expected Return Factor Sensitivity

A                               0.09                   0.50
B                                  0.13              0.75
C                                    0.17                1.50

Problem 1: If the model and the table are both correct, determine whether or not an arbitrage opportunity exists. If not, why not? If so, explain how to exploit it.

Reference no: EM132741844

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