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Arbitrage Oppurtunity Problem

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Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of 11%.

The risk-free rate is 6%. Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it. Give

specific details about how to form the portfolio, what to buy and what to sell assuming that the company-specific risk can be

neglected.

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Solution Summary

This posting gives solution to a arbitrage oppurtunity problem, given the beta and expected rate of return for two securities.

Solution Preview

An arbitrage opportunity exists because it is possible to form a portfolio ofsecurity A and the risk-free asset that has a ...

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