Question: Suppose we are in a standard APT factor model type world, with two factors F1 and F2. Suppose a well-diversified portfolio A has expected return

Suppose we are in a standard APT factor model type world, with two factors F1 and F2. Suppose a well-diversified portfolio A has expected return of 11%, with betas of 0.4 on the first factor and 0.6 on the second factor. Also assume that two factor portfolios exist (corresponding to the two factors we have), F1 has an expected return of 7%, and F2 has an expected return of 8%.

(a) Is there arbitrage here? If so, how would you construct the arbitrage portfolio? If not, why not?

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