In each of the following cases, determine whether or not there is an arbitrage opportunity and,where possible, describe the steps you would take in order to construct an arbitrage portfolio.Compute the certain payoff from your strategy. A.Two well-diversified portfolios P and Q have expected returns E(r,) = 13% andE(ra) = 10% respectively. Their respective betas are B, = 1 and Bg = 0.5. The risk-freerate is 5% and the borrowing at this rate is not possible.

An arbitrage pricing theory means the balance of the actual gain and predicted gain. It is based on…

A. = 10% respectively. Their respective betas are Bp = 1 and Ba E(ra) rate is 5% and the borrowing at this rate is not possible. Two well-diversified portfolios P and Q have expected returns E(rp) = 13% and 0.5. The risk-free

A. = 10% respectively. Their respective betas are Bp = 1 and Ba E(ra) rate is 5% and the borrowing at this rate is not possible. Two well-diversified portfolios P and Q have expected returns E(rp) = 13% and 0.5. The risk-free

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

In each of the following cases, determine whether or not there is an arbitrage opportunity and,
where possible, describe the steps you would take in order to construct an arbitrage portfolio.
Compute the certain payoff from your strategy.

A.
Two well-diversified portfolios P and Q have expected returns E(r,) = 13% and
E(ra) = 10% respectively. Their respective betas are B, = 1 and Bg = 0.5. The risk-free
rate is 5% and the borrowing at this rate is not possible.

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