Problem 5: Arbitrageurs' Play-Time Here we price securities assuming that the APT holds, while the risk-free rate is ry = 6%. Asset 81 B2 E(r) A 1.2 0.8 19.6% B 0.8 1.2 18.4% 1 1 ?? D 1.1 1.5 ?? 1. Price securities C and D (estimate the expected return). 2. What is the arbitrage profit you can make, if E(rc) is 20% and how? 3. Create a portfolio using securities A, B and the risk-free asset that replicates the factor exposures of asset C. 4. Create a portfolio using securities A, C and the risk-free asset that replicates the factor exposures of asset D. Problem 5: Arbitrageurs' Play-Time Here we price securities assuming that the APT holds, while the risk-free rate is ry = 6%. Asset 81 B2 E(r) A 1.2 0.8 19.6% B 0.8 1.2 18.4% 1 1 ?? D 1.1 1.5 ?? 1. Price securities C and D (estimate the expected return). 2. What is the arbitrage profit you can make, if E(rc) is 20% and how? 3. Create a portfolio using securities A, B and the risk-free asset that replicates the factor exposures of asset C. 4. Create a portfolio using securities A, C and the risk-free asset that replicates the factor exposures of asset D