Question: Assume stock returns are explained by a two-factor model as follows: The following three stocks are in equilibrium. Stock Return % Beta 1 Beta2 U

Assume stock returns are explained by a two-factor model as follows:

The following three stocks are in equilibrium.

Stock	Return %	Beta 1	Beta2
U	10	0.6	0.8
V	16	1.6	1.8
W	15	1.8	0.9

Derive the equilibrium model equation.

Assume there is stock J with beta 1 of 1 and beta 2 of 1.2. Stock Js rate of return is 14.4%. Is stock J in equilibrium? If not determine an arbitrage strategy and calculate the arbitrage profit. Show the proper weight of each stock.

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