Consider the following two assets i = 1, 2 with estimated regression coefficients a and b based on the regression model rit = ai + birmt + it with the usual assumptions:

Consider the following two assets i=1,2 with estimated regression coefficients a^ and b based on the regression model rit=ai+birmt+it with the usual assumptions: The expected return of the market factor is 10% (there is only one factor). a) Assume that the asset have no residual risk. Check for arbitrage opportunities along the lines of the APT. b) Give an estimation of the risk-free rate. Show your arguments! a) If we allow for residual risk, does that change the conclusion under a)? Discuss! Consider the following two assets i=1,2 with estimated regression coefficients a^ and b based on the regression model rit=ai+birmt+it with the usual assumptions: The expected return of the market factor is 10% (there is only one factor). a) Assume that the asset have no residual risk. Check for arbitrage opportunities along the lines of the APT. b) Give an estimation of the risk-free rate. Show your arguments! a) If we allow for residual risk, does that change the conclusion under a)? Discuss