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Suppose that there are two assets, A and B, that are perfectly positively correlated, i.e. AB =1.0. Suppose further that E(R A )=8%, A =20%, E(R B )=10%, B =30%, and the risk free rate is 7%. Is there an arbitrage opportunity? If yes, state very carefully which asset you will buy, which you will sell, and how much (in what proportion).

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Category:- Basic Finance
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