Question: 1. Given a one-factor economy, determine whether the three well-diversified assets listed below are correctly priced (10 marks), and indicate an arbitrage transaction that could

1. Given a one-factor economy, determine whether the three well-diversified assets listed below are correctly priced (10 marks), and indicate an arbitrage transaction that could be used to profit from this pricing (10 marks). The risk-free return is 2%, while the factor premium is 8%. (Total: 20 marks)
Asset Factor sensitivity
A 1.5
B 1.2
C 0.8
Return 13.00% 11.60% 8.40%

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