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3 Suppose that three stocks (A, B and C) and two common risk factors (1 and 2) have the following relationship: E(R1)=(1.1)1+(0.8)2E(R0)=(0.7)1+(0.6)2E(R0)=(0.3)1+(0.4)3 (a) If 1=4% and 2=2%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for 30 and wil not pay a dividend in the next year. (b) Suppose that you know that next year the prices for Stocks A,B and C wil actually be 31.50,35.00 and 30.50. Create and demonstrate a riskless, artitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sala. 3 Suppose that three stocks (A, B and C) and two common risk factors (1 and 2) have the following relationship: E(R1)=(1.1)1+(0.8)2E(R0)=(0.7)1+(0.6)2E(R0)=(0.3)1+(0.4)3 (a) If 1=4% and 2=2%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for 30 and wil not pay a dividend in the next year. (b) Suppose that you know that next year the prices for Stocks A,B and C wil actually be 31.50,35.00 and 30.50. Create and demonstrate a riskless, artitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sala