Question: Consider 3 factor model. Suppose the risk free rate is 2%. Portfolio of market factor of size factor of value factor Expected return A -2

Consider 3 factor model. Suppose the risk free rate is 2%. Portfolio of market factor of size factor of value factor Expected return A -2 0 0.5 5% B 0 1.2 -0.5 10% C 2 -1.2 0 ?? (a) What would be the expected return of portfolio C? (b) Suppose the expected return of portfolio C is given as your answer in Question (a). But the risk-free rate is down to 1%. Is there an arbitrage opportunity? Describe the arbitrage strategy.

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