Question: Suppose the expected market return is R m = 10%, the zero risk rate R f = 2%, the expected return of the portfolio A,

Suppose the expected market return is R_m = 10%, the zero risk rate R_f = 2%, the expected return of the portfolio A, R_a= 6%, the beta of A, _a = 0.3 and respectively for the portfolio B, R_b = 9% and _b = 1.2. Let A' and B' portfolios on SML, so that _a' = 0.3 and _b'= 1.2. Explain with the help of a diagram the arbitrage strategies highlighted by the current pricing.

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