Question: Problem 9 Assume that the following two-index model describes returns: Ri= di + biili + bi212 Assume the following three portfolios are observed. Portfolio Expected

Problem 9 Assume that the following two-index model describes returns: Ri=

Problem 9 Assume that the following two-index model describes returns: Ri= di + biili + bi212 Assume the following three portfolios are observed. Portfolio Expected return bi1 bi2 A 12 1 0.5 B 3 0.2 13.4 12 C 3 -0.5 a) Find the equation of the plane that must describe equilibrium returns. b) Illustrate the arbitrage opportunities that would exist if a portfolio called D with the following properties were observed (Show what portfolios and assets to buy or sell and also show how much profit you will make off this process): Problem 9 Assume that the following two-index model describes returns: Ri= di + biili + bi212 Assume the following three portfolios are observed. Portfolio Expected return bi1 bi2 A 12 1 0.5 B 3 0.2 13.4 12 C 3 -0.5 a) Find the equation of the plane that must describe equilibrium returns. b) Illustrate the arbitrage opportunities that would exist if a portfolio called D with the following properties were observed (Show what portfolios and assets to buy or sell and also show how much profit you will make off this process)

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