An investor can go either long or short in three well diversified portfolios, A, B...
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An investor can go either long or short in three well diversified portfolios, A, B and C and a risk free asset that returns 3%. The investor thinks that the returns on these portfolios can be described by a two factor model, as follows:
Where F1 and F2 are factors that affect portfolio returns. Their expected value is zero. Is it possible for this investor to construct an arbitrage portfolio and if so, then how?
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