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Illustrate the arbitrage opportunities

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Modern Portfolio Theory and Investment Analysis ch16. practice problem.

Assume that the following two-index model describes returns: Ri = ai +bi1I1 +bi2I2 + ei

Assume that the following three portfolios are observed

portfolio     Expected Return       bi1          bi2

A                    12                      1.0           1

B                     13                     1.5            2

C                     17                     0.5           -3

Find the equation of the plane that must describe equilibrium returns.

And Referring to the result of above, illustrate the arbitrage opportunities that would exist if a portfolio called D with the following characteristics were observed:

R(bar)D =15      bD1 =1       bD2  = 0

Reference no: EM131061214

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