Question: Consider securities in the following table: A B Standard deviation (%) 40 10 Correlation with the market portfolio 0.2 0.6 The expected return on the

Consider securities in the following table:

A B

Standard deviation (%) 40 10

Correlation with the market portfolio 0.2 0.6

The expected return on the market portfolio is 9%, and the volatility of the market return is 15%. The risk free rate of return is 2%.

1) If both securities are yielding a return of 5%, is there an arbitrage opportunity? Explain the trading strategy in details.

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