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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.

    © BrainMass Inc. brainmass.com June 3, 2020, 8:46 pm ad1c9bdddf
    https://brainmass.com/business/arbitrage-pricing-theory/arbitrage-oppurtunity-problem-151444

    Solution Preview

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

    Solution Summary

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

    $2.19

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