Solution-Is there an arbitrage opportunity

Is there an arbitrage opportunity

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Reference no: EM133068554

Suppose that the economy is described by three growth states: strong, moderate, and weak. The probabilities of strong, moderate, and weak growth states are 0.3, 0.5 and 0.2, respectively. Assume that the risk-free rate is 2%. Assume that you can buy or short three stocks: A, B, and C, with the following return distribution:

Strong Growth		Moderate Growth	Weak Growth
A	30%	10%	-10%
B	11.8%	4.8%	-2.2%
C	-5%	0%	5%

Is there an arbitrage opportunity? Explain your answer, and if the answer is "yes", describe in detail how you would take advantage of it.

Reference no: EM133068554

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Is there an arbitrage opportunity

Reference no: EM133068554

Reference no: EM133068554

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