Determine whether or not an arbitrage opportunity exists

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Reference no: EM132743676

Question - 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

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: EM132743676

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