Question: Problem 7-12 Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) (1.1)

Problem 7-12 Suppose that three stocks (A, B, and C) and two

Problem 7-12 Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) (1.1) + (0.8)A (0.6)42 E(Ra) (0.7)41 E(RC) (0.3341 + (0.4)4) a. If A 2% and A-1%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $40 and will not pay dividend in the next year. Do not round intermediate calculations. Round your answers to the nearest cent. Expected price for Stock A: S Expected price for Stock B: $ Expected price for Stock C b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.60, $35.29, and $30.37. Assume that you can use the proceeds from any necessary short sale. Determine the riskless, arbitrage investment to take advantage of these mispriced securities. In order to create a riskless arbitrage investment, an investor would select What is the profit from your investment? Round your answer to the nearest cent a riskless arbitrage investment.

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