Question: Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) (1.0)11 + (0.7)12 E(RB)

Suppose that three stocks (A, B, and C) and two common

Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) (1.0)11 + (0.7)12 E(RB) = (0.7) 11 + (0.6) 12 E(Rc) = (1.3) 1 + (0.8)12 a. If 11 = 4% and 12 = 5%, 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: $ 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 will actually be $45.80, $40.79, and $41.17. 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- a riskless arbitrage investment. What is the profit from your investment? Round your answer to the nearest cent. $ Grade it Now Save & Continue Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: E(RA) (1.0)11 + (0.7)12 E(RB) = (0.7) 11 + (0.6) 12 E(Rc) = (1.3) 1 + (0.8)12 a. If 11 = 4% and 12 = 5%, 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: $ 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 will actually be $45.80, $40.79, and $41.17. 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- a riskless arbitrage investment. What is the profit from your investment? Round your answer to the nearest cent. $ Grade it Now Save & Continue

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