Consider a 3-stock economy, with returns given by a 2-factor model as follows,
rA1 (asset 1) = 0.06 + 2F2
rA2(asset 2) = 0.08 + F1 + 2F2
rA3(asset 3) = 0.15 + 3F1 + 4F2
and a risk-free asset with a return of 5%
Q1..Is there an arbitrage opportunity?
Q2.And if so, how do we exploit it? If not then write out the APT equation for each security, include the risk premium on each of the factors