Consider a two factor model of expected returns where the risk free rate is 6% and the expected risk premiums on the factor portfolios are 3% and 7%. If the factor portfolios are “ideal” and tradable, determine if an arbitrage opportunity exists for the portfolio given below and specify how can it be exploited.

portfolio	Bf1	Bf2	Expected return
A	1.4	0.8	0.41

Answer rating: 100% (QA)

Given Risk free rate is 6 Factor 1 risk premium 3 Factor 2 risk peridium 7 Factor 1 beta ... View the full answer