Question: Assume that the following one-factor model describes the expected return for portfolios: Also assume that all investors agree on the expected returns and factor sensitivity

Assume that the following one-factor 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:

Assuming the one-factor model is correct and based on the data provided for Portfolios A, B, and C, determine if an arbitrage opportunity exists and explain how it might be exploited

ER) = 0. 10 + 0.12B, Portfolio Expected Return Factor Sensitivity 0.80 0.20 0.15 1.00 0.24 1.20

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